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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ISONICS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 77-0338561
(State or other jurisdiction) (I.R.S. Employer of incorporation or organization)
Identification Number)
</TABLE>
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JAMES E. ALEXANDER
PRESIDENT, ISONICS CORPORATION
5906 MCINTYRE STREET
GOLDEN, COLORADO 80403
(303) 279-7900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
HERRICK K. LIDSTONE, JR.
NORTON LIDSTONE, P.C.
SUITE 850, THE QUADRANT
5445 DTC PARKWAY
ENGLEWOOD, CO 80111
TEL: 303-221-5552
FAX: 303-221-5553
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If this form is being filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number in the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number in the earlier effective registration statement
for the same offering. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Class B Common Stock Purchase Warrants....... 810,000 $7.00(a) $5,670,000 $1,497
Shares of common stock underlying Class
B Common Stock Purchase Warrants........... 810,000 $5.80(b) $4,698,000 $1,240
Class C Common Stock Purchase Warrants....... 810,000 $0 $0 $0
Shares of common stock underlying Class C
Common Stock Purchase Warrants............. 810,000 $10.00(b) $8,100,000 $2,139
Class B Common Stock Purchase Warrants
issuable upon exchange of Warrants
underlying Underwriter Warrants............ 80,000 $7.00(a) $560,000 $148
Shares of common stock underlying Class B
Common Stock Purchase Warrants............. 80,000 $5.80(b) $464,000 $123
Class C Redeemable Common Stock Purchase
Warrants................................... 80,000 $-0- $-0- $-0-
Shares of common stock underlying Class C
Redeemable Common Stock Purchase
Warrants................................... 80,000 $10.00(b) $800,000 $211
TOTAL........................................ $20,292,000 $5,358
</TABLE>
(a) Based on the closing market price for the Class A Common Stock Purchase
Warrants on May 16, 2000, pursuant to Regulation C, Rule 457(f)(1) and
Rule 457(c) under the Securities Act of 1933, as amended.
(b) Based on the exercise price of the Class B and Class C Common Stock Purchase
Warrants, respectively, pursuant to Rule 457(g)(1) under the Securities Act
of 1933, as amended.
(c) The fee was calculated at $0.000264 per $1,000,000 offering price as set
forth in Rate Advisory No. 11 (January 5, 2000).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 6
The Exchange Offer.......................................... 14
Use of Proceeds............................................. 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 27
Management.................................................. 43
Security Ownership of Certain Beneficial Holders and
Management................................................ 45
Section 16(a) Beneficial Ownership Reporting Compliance..... 47
Executive Compensation...................................... 50
Certain Relationships and Related Party Transactions........ 54
Isonics' Capital Stock...................................... 56
Market for Common Equity and Related Stockholder Matters.... 58
Shares Available for Future Sale............................ 59
Securities and Exchange Commission Position on
Indemnification for Securities Act Liabilities............ 60
Experts..................................................... 60
Legal Matters............................................... 60
How to Obtain Additional Information........................ 61
</TABLE>
------------------------
Isonics has not authorized anyone to give any information or make any
representation about the offering that differs from, or adds to, the information
in this prospectus or in its documents that are publicly filed with the
Securities and Exchange Commission. Therefore, if anyone does give you different
or additional information, you should not rely on it. The delivery of this
prospectus and/or the exchange of warrants of common stock does not mean that
there have not been any changes in Isonics' condition since the date of this
prospectus. If you are in a jurisdiction where it is unlawful to offer to
exchange or exercise the securities offered by this prospectus, or if you are a
person to whom it is unlawful to direct such activities, then the offer
presented by this prospectus does not extend to you. This prospectus speaks only
as of its date except where it indicates that another date applies. Documents
that are incorporated by reference in this prospectus speak only as of their
date, except where they specify that other dates apply. The information in this
prospectus is not complete and may be changed. The holders may not exchange and
exercise these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to exchange or exercise these securities and it is not soliciting an offer to
exchange or exercise these securities in any state where the exchange or
exercise is not permitted.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
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SUBJECT TO COMPLETION, DATED MAY 24, 2000
PROSPECTUS
, 2000
ISONICS CORPORATION
890,000 CLASS B WARRANTS
890,000 CLASS C WARRANTS
1,780,000 SHARES OF COMMON STOCK UNDERLYING
CLASS B AND CLASS C WARRANTS
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Isonics Corporation ("Isonics" or "We") hereby offers holders of outstanding
Class A Warrants and Class A Warrants that may be issued upon the exercise of
certain outstanding warrants ("Underwriter's Warrants") the opportunity to
exchange their Class A Redeemable Warrants ("Class A Warrants") for Class B
Warrants ("Class B Warrants"). The exercise price for the Class B Warrants is
$5.80 per share. If you exercise the Class B Warrants before their expiration
date, we will issue to you one share of Common Stock and one Class C Redeemable
Warrant ("Class C Warrants"). The Class B Warrants will expire on
(90 days after the date of this prospectus). The Class C Warrants (which
we will issue only if you exercise the Class B Warrants) expire (three
years after the date of this prospectus), will be exercisable for one share of
Common Stock at a price of $10.00 per share, and will be redeemable if our
Common Stock trades at or above $15.00 per share for any 20 of 30 consecutive
trading days.
Should you choose to do so, you may also exercise your Class B Warrants when
you submit your Class A Warrants for exchange. You must exercise your Class B
Warrants before their expiration date or you will lose your right to exercise
those warrants.
Our Common Stock and Class A Warrants are traded in the over-the-counter
market and quoted through the OTC Bulletin Board under the symbol "ISON" and
"ISONW" On May 22, 2000, the reported closing price of our Common Stock was
$5.75 per share and of our Class A Warrants was $3.50 per warrant.
AN INVESTMENT IN OUR CLASS B WARRANTS AND OUR COMMON STOCK (SHOULD YOU
CHOOSE TO EXERCISE ANY OF OUR WARRANTS) INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD EXCHANGE YOUR CLASS A WARRANTS FOR CLASS B WARRANTS ONLY IF YOU ARE
PREPARED TO EXERCISE YOUR CLASS B WARRANTS PROMPTLY AND CAN THEN AFFORD A
COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6. In
deciding whether to exchange the warrants offered, you should rely only on the
information contained in this document. We have not authorized anyone to provide
you with any information that is different from this information.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ONLY RESIDENTS OF , , AND STATES MAY EXCHANGE THEIR
CLASS A WARRANTS OR EXERCISE THEIR CLASS B OR C WARRANTS. WE HAVE NOT QUALIFIED
THE CLASS B OR C WARRANTS UNDER THE LAWS OF ANY OTHER STATE. WHEN YOU EXERCISE
THE CLASS B OR C WARRANTS, YOU WILL HAVE TO PROVIDE US INFORMATION AS TO YOUR
STATE OF RESIDENCE. WE MAY SEEK QUALIFICATION FROM TIME-TO-TIME IN OTHER STATES;
YOU MAY CALL ISONICS CORPORATION AT 303-279-7900 TO DETERMINE WHETHER YOUR STATE
OF RESIDENCE HAS BEEN INCLUDED.
4
<PAGE>
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
SUMMARY
This summary presents selected information from this prospectus. You should
carefully read this entire document and the documents to which the prospectus
refers in order to understand this offering. See "Additional Information" (page
61).
ISONICS CORPORATION
Isonics is an advanced materials and technology company which develops and
commercializes products based on enriched stable and radioactive isotopes. The
Common Stock of Isonics is traded in the over-the-counter market and is quoted
on the OTC Bulletin Board under the symbol "ISON." The market for our stock has
historically been characterized generally by low volume and broad price and
volume volatility. We cannot give any assurance that a stable trading market
will develop for our stock.
The address of our principal executive offices and our telephone and
facsimile numbers at that address are:
Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300
THE EXCHANGE OFFER
GENERAL. Isonics hereby offers holders of our outstanding Class A Warrants
the opportunity to exchange their Class A Warrants for an equal number of
Class B Warrants. The Class B Warrants are exercisable:
- for one share of Common Stock and one Class C Warrant
- for a purchase price of $5.80 per share
- through (90 days after the date of this prospectus).
When issued to holders who exercise their Class B Warrants, the Class C Warrants
will:
- expire , 2003 (three years after the date of this prospectus),
- be exercisable for one share of Common Stock at a price of $10.00 per
share, and
- be redeemable if our Common Stock trades at or above $15.00 per share for
any 20 of 30 consecutive trading days.
Class A Warrants submitted for exchange will be cancelled.
Any person who has exercised a Class A Warrant prior to this exchange offer
will be given a Class C Warrant for no additional consideration, thus giving the
Class A Warrant holder who exercised prior to this exchange offer the same value
as the Class A Warrant holders who accept this exchange offer before exercise.
Isonics will not receive any cash proceeds from the exchange, however Isonics
will receive proceeds upon exercise of the Class B Warrants or the Class C
Warrants, if any are exercised.
TERM OF THE EXCHANGE OFFER AND PROCEDURES FOR EXCHANGING WARRANTS. This
exchange offer will remain open until , 2000 or such later date as
the Board of Directors may determine. To submit your Class A Warrants for
exchange, you should complete the Letter of Transmittal
4
<PAGE>
accompanying this prospectus and deliver it to the exchange agent, prior to the
expiration of the exchange offer, all as described in the section commencing on
page 14 entitled "The Exchange Offer."
The method of delivery of Letters of Transmittal and certificates to the
exchange agent will be at the election and risk of each holder of the Class A
Warrants. The Letters of Transmittal and certificates can be sent to the
exchange agent by hand delivery, courier service, or by mail. If you send the
Letters of Transmittal and certificates by mail, we recommended that you send
them by registered mail with return receipt requested; we also recommend that
you allow a sufficient number of days to ensure that your Letter of Transmittal
and certificates are delivered to the exchange agent prior to the expiration
time.
Isonics will determine all questions concerning the timeliness, validity,
form and eligibility of submissions. Our determination on these matters will be
binding. We may, in our sole discretion, waive any defect or irregularity, or
permit a defect or irregularity to be corrected within such time as we may
establish; alternatively, we may reject any purported submission. Letters of
Transmittal will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we may determine in
our sole discretion.
NO WITHDRAWAL RIGHTS. Any tender of the Class A Warrants to the exchange
agent will be irrevocable. A holder who has submitted his or her Class A
Warrants for exchange may not withdraw them. Isonics has the right, in its sole
discretion, to extend the expiration date of the exchange offer or offer
withdrawal rights on a case-by-case basis in the future.
CONSEQUENCES OF FAILURE TO EXCHANGE. There are no consequences if you fail
to exchange your Class A Warrants before the expiration date of the exchange
offer. You will continue to own your Class A Warrants which will be subject to
the same terms and conditions as prior to the exchange offer. After the
expiration of the exchange offer, however, you will no longer have a right to
exchange your Class A Warrants for Class B Warrants.
Any person exercising their Class A Warrants after the expiration of the
exchange offer will not have the right to receive a Class C Warrant.
NO PROCEEDS FROM EXCHANGE OFFER. Isonics will not receive any proceeds from
any person in connection with the exchange offer. Isonics will only receive
proceeds from persons who choose, in their discretion, to exercise the Class A
Warrants, the Class B Warrants, or the Class C Warrants. Any proceeds that
Isonics may receive from the exercise of warrants will be added to our working
capital and used for corporate purposes.
RISK FACTORS
THE PURCHASE OF ISONICS COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6. We have not authorized
anyone to give you information or to make any representation other than those
contained in this prospectus.
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
In our effort to make the information in this prospectus more meaningful,
this prospectus contains both historical and forward-looking statements. All
statements other than statements of historical fact are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
in this prospectus are not based on historical facts, but rather reflect the
current expectations of our management concerning future results and events.
5
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The forward-looking statements generally can be identified by the use of
terms such as "believe," "expect," "anticipate," "intend," "plan," "foresee,"
"likely," "will" or other similar words or phrases. Similarly, statements that
describe our objectives, plans or goals are or may be forward-looking
statements.
Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of Isonics to be different from any future results, performance and achievements
expressed or implied by these statements. You should review carefully all
information, including the financial statements and the notes to the financial
statements included in this prospectus. In addition to the factors discussed
under "Risk Factors," the following important factors could affect future
results, causing the results to differ materially from those expressed in the
forward-looking statements in this prospectus:
- Demand for, and acceptance of, our materials;
- Changes in development, distribution and supply relationships;
- The impact of competitive products and technologies;
- The risk of operations in Russia and the Republic of Georgia;
- Dependence on future product development;
- The possibility of future customer concentration;
- Our dependence on key personnel;
- The volatility of our stock price; and
- The impact of new technologies.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in the
forward-looking statements in this prospectus. Other unknown or unpredictable
factors also could have material adverse effects on the future results of
Isonics. The forward-looking statements in this prospectus are made only as of
the date of this prospectus and Isonics does not have any obligation to publicly
update any forward-looking statements to reflect subsequent events or
circumstances. Isonics cannot assure you that projected results will be
achieved.
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in Isonics Corporation. If any of the contingencies discussed
in the following paragraphs or other materially adverse events actually
materialize, the business, financial condition and results of operations could
be materially and adversely affected. In such a case, the trading price of our
Common Stock could decline, and you could lose all or part of your investment.
HISTORY OF LOSSES; ENGAGING IN NEW LINES OF BUSINESS
We have not operated profitably to date since inception. Through
October 31, 1999 (the end of our fiscal quarter immediately preceding the
Eagle-Picher transaction), we recognized accumulated losses of more than
$4,500,000 notwithstanding receiving substantial revenues from the sale of
depleted zinc and other products.
The depleted zinc business had accounted for a significant portion of our
revenues during the past fiscal years. Following the sale of our depleted zinc
business, our primary risk is our reliance on products that have to date not
produced significant revenues. We have historically, and expect to continue to,
operate with little backlog and a significant portion of our net revenues have
been, and we
6
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believe will continue to be, derived from a limited number of orders that are
processed and shipped in the same quarter in which the orders are received.
These orders are primarily for radioisotopes. The timing of such orders and
their fulfillment has caused, and is likely to continue to cause, material
fluctuations in our operating results. Our expense levels are relatively fixed,
and prior quarters have indicated these factors will affect our operating
results for future periods.
We are engaging in research and development to diversify our business and to
expand other lines of our business. We are now seeking to identify and evaluate
a variety of new stable isotope products and potential markets for economic and
technical feasibility. We will continue to fund research and development to
improve technologies for isotope separation and materials processing
technologies. During fiscal 1999 and 1998, research and development expenses
were $1,155,000 and $811,000, respectively. Research and development
expenditures for the nine months ended January 31, 2000, amounted to
approximately $919,000. We cannot offer any assurance that our current or future
lines of business and our research and development efforts will be profitable.
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and "BUSINESS."
RELATIONSHIP WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS
Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
current and planned facilities in Oklahoma. The Supply Agreement locks-in what
we believe is a favorable purchase price for the aforementioned isotopes. As
partial consideration for the exclusivity provision, we agreed to pay
Eagle-Picher a fee equal to 3.0% of the net revenues from all sales made by us
of products incorporating enriched silicon isotopes supplied by Eagle-Picher. We
can offer no assurance that Eagle-Picher will be able to produce isotopes
meeting the specifications of the Supply Agreement for delivery to Isonics by
December 31, 2000. A delay in Eagle-Picher's ability to begin production could
force us to seek other suppliers. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and
"BUSINESS."
LIMITED SOURCES FOR RAW MATERIALS
Stable isotopes constitute the principal raw material required for the
manufacture of our products. The principal sources for enriched stable isotopes
are suppliers in Russia and the Republic of Georgia. Oak Ridge National
Laboratory in Oak Ridge, Tennessee, which relies on government funding for
continuing production, and certain foreign facilities in the world including
private and pseudo-governmental organizations in Great Britain, Germany, The
Netherlands and South Africa, have the potential to produce stable isotopes, and
in certain cases, actually produce isotopes. Although currently enriched stable
isotopes are also available from additional foreign sources, there can be no
assurance that there will continue to be an adequate supply of enriched stable
isotopes. Although we expect that our current supply contracts will be
sufficient to produce most isotopes, the production processes require various
proprietary separation techniques, which although developed by our suppliers,
may not have all been tested to date and as to the success of which there can be
no assurance. These limited sources of raw materials may result in an inability
to deliver radioisotopes or other isotopes in accordance with our contractual
requirements (whether or not the failure is our fault) and possible resulting
liability. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" and "BUSINESS."
OPERATIONS IN RUSSIA AND THE REPUBLIC OF GEORGIA
Operations in Russia and the Republic of Georgia ("Georgia") entail certain
risks. Recently, the former republics of the Soviet Union including Georgia have
experienced political, social and economic change as they obtained independence
from the former central government in Moscow. Certain of the republics,
including Russia and Georgia, have attempted to transition from a central
controlled
7
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economy toward a market-based economy. These changes have involved, in certain
cases, armed conflict. The political or economic instability in these republics
may continue or even worsen. The supply of stable isotopes could be directly
affected by political, economic and military conditions in Russia and Georgia.
Accordingly, our operations could be materially adversely affected if
hostilities in Russia or Georgia should occur, if trade between Russia or
Georgia and the United States were interrupted, if political conditions in
Russia or Georgia disrupt transportation or processing concerning our goods, if
laws or government policies concerning foreign business operations in Russia or
Georgia change substantially, or if tariffs are introduced. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS" and "BUSINESS."
DEPENDENCE ON FUTURE PRODUCT DEVELOPMENT
On December 1, 1999, we sold our depleted zinc business, which provided 35%
of our revenues in fiscal 1999. As a result our future operations will be more
heavily dependent upon our ability to develop new products using stable and
radioisotopes and to market and sell those products profitably. While we have a
high degree of confidence we can be successful, we can expect to incur
significant operating losses until we are able to do so. Our ability to develop,
market and sell these products will depend on our suppliers' (including
Eagle-Picher) ability to meet our demand for stable and radioisotopes, as well
as, other suppliers who modify the chemical and physical forms of these
isotopes. There can be no assurance that we will be able to develop products
that can be profitably marketed and sold. SEE "BUSINESS."
CUSTOMER CONCENTRATION
Prior to fiscal 1999, substantially all of our net revenues in any
particular period have been attributable to a limited number of customers,
primarily General Electric Corporation. Consistent with our historical
experience, our quarterly results during fiscal year 2000 were affected
materially by the level of orders received from a limited number of significant
depleted zinc users during such quarters and product shipments by us to our
depleted zinc customers during such period. Despite the sale of the depleted
zinc business, we continue to be subject to a certain degree of variability
based on the timing of sales of our stable and radioisotopes orders. We cannot
be assured that our principal customers will continue to purchase our products.
A decrease in or loss of orders from one or more major customers would have a
material and adverse effect on our financial condition and results of
operations. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "BUSINESS."
While our goal is to diversify our customer base, we expect to continue to
depend upon a relatively small number of customers for a significant percentage
of our revenues for the foreseeable future. Significant reductions in sales to
any of our large customers have had and may in the future have a material
adverse effect on us. We cannot guarantee that present or future customers will
not terminate their arrangements with us or significantly change, reduce or
delay the amount of manufacturing services ordered from us. A termination of a
manufacturing relationship or change, reduction or delay in orders could harm
us.
FACTORS AFFECTING OPERATING RESULTS; VARIABILITY OF ORDERS
We operate with little backlog. A significant portion of our net revenues
have been, and we believe will continue to be, derived from a limited number of
orders that are processed and shipped in the same quarter in which the orders
are received. The timing of such orders and their fulfillment has caused, and is
likely to continue to cause, material fluctuations in our operating results. Our
expense levels are relatively fixed, and as has been the case in prior quarters,
these factors will affect our operating results for future periods. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS."
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MANAGEMENT OF GROWTH
We have experienced periods of rapid growth that have placed a significant
strain on our financial and managerial resources. Our ability to manage growth
effectively, particularly given our increasing scope of operations, will require
us to continue to implement and improve our management, operational, and
financial information systems, as well as to develop the management skills of
our personnel and to train, motivate and manage our employees. Our failure to
effectively manage growth could have a material adverse effect on our business,
financial condition and results of operations. SEE "BUSINESS."
DEPENDENCE ON KEY PERSONNEL
Our future success will depend in significant part upon the continued
service of our key technical, sales and senior management personnel, including
James E. Alexander, our President and Chief Executive Officer; Boris
Rubizhevsky, our Senior Vice President, Isotope Production and Supply; Robert
Cuttriss, President of Interpro; and Herbert Hegener, Managing Director of
Chemotrade. We maintain $1,000,000 of key man life insurance on the lives of
Messrs. Alexander, Rubizhevsky and Cuttriss and all are covered by employment
agreements extending through September 2001, 2001, and 2003, respectively
(although the individuals may terminate these agreements prematurely, in their
discretion). Mr. Hegener is covered by an employment agreement extending through
the year 2001. We believe that our future success will depend in large part upon
our ability to attract and retain qualified personnel for our operations. The
failure to attract or retain such persons could materially adversely affect our
business, financial condition and results of operations. SEE "MANAGEMENT."
POSSIBLE NEED FOR ADDITIONAL FINANCING
We anticipate no need for additional financing in the next twelve months,
but we do anticipate a need for a substantial amount of financing after the
fiscal year ending April 30, 2001. Factors that may lead to a need for
additional financing include:
delays in Eagle-Picher's production of silicon and carbon isotopes from its
plant in Oklahoma, and the resulting delays in their delivery of the
isotopes to us under the terms of the supply agreement;
unanticipated expenses in developing our new products or in producing or
marketing our existing products;
the necessity of having to protect and enforce our intellectual property
rights;
technological and market developments; and
a corporate decision to expand our production capacity through capital
investment or acquisition.
The exercise of the Class A Warrants, the Class B Warrants, or the Class C
Warrants will provide us with some additional financing, but we cannot offer any
assurance that any warrants will be exercised. The unavailability of additional
financing, when needed, could have a material adverse effect on our business.
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS AND "BUSINESS."
NO ASSURANCE AS TO VALIDITY OF INTELLECTUAL PROPERTY RIGHTS
We rely primarily on a combination of trade secrets, confidentiality
procedures and contractual provisions to protect our technology. Despite our
efforts to protect our rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our technology and products is difficult. In
addition, the laws of many countries do not protect our rights in information,
materials and intellectual property that we regard as proprietary and that are
protected under the laws of the United States. There can be no assurance that
our means of protecting our rights in proprietary information, materials and
technology will be
9
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adequate or that our competitors will not independently develop similar
information, technology, or intellectual property. SEE "BUSINESS."
We currently have no patents in our own name and have not filed any patent
applications. We have rights to several isotopically engineered innovations
regarding electronic and optical materials that we believe may be patentable.
Ongoing work in the area of isotope separation by chemical means may also lead
to patentable inventions. In such cases, we intend to file patent applications
for some of these modifications, improvements, and inventions and to protect
others as trade secrets. There can be no assurance, however, that patents on
such modifications, improvements or inventions will be issued or, if issued,
that such patents or modifications and improvements protected as trade secrets
will provide meaningful protection.
In April 1999, we announced that we had entered into an exclusive licensing
agreement with Yale University that entitles us to exclusive intellectual
property rights to patents covering semiconductor devices derived for
isotopically engineered materials. The license requires payment by us of a
royalty based on a percentage of our or our sublicenses' net sales of products
derived from technology covered by the Yale patents (#5,144,409, dated
September 1, 1992, and #5,442,191, dated August 15, 1995).
Third parties may have filed applications for or have been issued patents
and may obtain additional patents and proprietary rights related to products or
processes competitive with or similar to those of Isonics. We may not be aware
of all patents potentially adverse to our interests that may have been issued to
others and there can be no assurance that such patents do not exist or have not
been filed or may not be filed or issued. If patents have been or are issued to
others containing preclusive or conflicting claims and such claims are
ultimately determined to be valid, we may be required to obtain licenses thereto
or to develop or obtain alternate technology. There can be no assurance that
such licenses, if required, would be available on commercially acceptable terms,
if at all, or that we would be able to develop or obtain alternate technology,
which would have a material adverse effect on our business.
There can be no assurance that the validity of any of the patents licensed
to, or that may in the future be owned by us would be upheld if challenged by
others in litigation or that our products or technologies, even if covered by
our patents, would not infringe patents owned by others. We could incur
substantial costs in defending suits brought against us, or any of our
licensors, for infringement, in suits by us against others for infringement, or
in suits contesting the validity of a patent. Any such proceedings may be
protracted. In any suit contesting the validity of a patent, the patent being
contested would be entitled to a presumption of validity and the contesting
party would be required to demonstrate invalidity of such patent by clear and
convincing evidence. If the outcome of any such litigation were adverse to our
interests, our business would be materially adversely affected.
In certain instances, we may choose not to seek patent protection and may
rely on trade secrets and other confidential know-how to protect our
innovations. There can be no assurance that protectable trade secrets or
know-how will be established or, if established, that they will remain protected
or that others will not independently and lawfully develop similar or superior
innovations. We require all employees to sign intellectual property assignment
and non-disclosure agreements. In certain instances, we will enter into
agreements with our employees pursuant to which the employee will be entitled to
a small royalty with respect to products developed by Isonics based upon the
employee's inventions. In addition, all directors, consultants and other parties
to whom confidential information has been or will be disclosed have or will
execute agreements containing confidentiality provisions. There can be no
assurance, however, that any such intellectual property assignment agreements
and confidentiality agreements will be complied with or will be enforceable.
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<PAGE>
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
Within the United States, we believe there currently is no producer of a
full range of stable enriched isotopes for commercial sale. The U.S. government
produces isotopes, but primarily for research purposes. There can be no
assurance that a third party will not contract with the U.S. government to
acquire isotopes for commercial sale. Outside the United States, many countries
and businesses produce stable and radioactive isotopes. Some of these businesses
have substantially greater capital and other resources than do we. SEE
"BUSINESS."
Further, it is possible that future technological developments may occur,
and these developments may render our radioisotopes and stable isotopes obsolete
or non-competitive.
Rapidly changing technology and continuing process development characterize
the market for our manufacturing services. We believe that our future success
will depend in large part upon our ability to develop and market manufacturing
services which meet changing customer needs, maintain technological leadership
and successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis. We cannot guarantee that our
process development efforts will be successful.
In the future, we may face substantial competition, and we may not be able
to compete successfully against present or future competitors.
ENVIRONMENTAL COMPLIANCE
We are subject to a variety of federal, state, and local environmental
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during the manufacturing process. While we believe that we are in
compliance with all environmental regulations, if we fail to comply with present
and future regulations we could be subject to future liabilities or the
suspension of production. In addition, these regulations could restrict our
ability to expand our facilities or could require us to acquire costly equipment
or to incur other significant expenses to comply with governmental regulations.
Historically, our costs of compliance with environmental regulations have not
been material. SEE "BUSINESS."
CONTROL BY DIRECTORS AND OFFICERS
Even if all of the Class A Warrants are exercised (which we cannot assure),
our directors and officers will beneficially own 47.0% of the outstanding shares
of Common Stock and, accordingly, will have the ability to elect a majority of
the directors of Isonics and otherwise control the company. SEE "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
PRODUCT LIABILITY EXPOSURE AND INSURANCE
The use of our radioisotopes in radiopharmaceuticals and in clinical trials
may expose us to potential product liability risks that are inherent in the
testing, manufacture, marketing and sale of human diagnostic and therapeutic
products. We currently have product liability insurance; however, there can be
no assurance that a product liability or other claim would not materially and
adversely affect our business or financial condition. SEE "BUSINESS."
PRICE VOLATILITY
The trading price of our securities has been subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, our
announcements of technological innovations or new products by us or our
competitors, and other events or factors. The securities markets have from time
to time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. Announcements of
delays in our testing and
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<PAGE>
development schedules, technological innovations or new products by Isonics or
our competitors, developments or disputes concerning patents or proprietary
rights, regulatory developments in the United States and foreign countries,
public concern as to the safety of products containing radioactive compounds and
economic and other external factors, as well as period-to-period fluctuations in
our financial results, may have a significant impact on the market price of our
securities. In addition, the realization of any of the risks described in these
"Risk Factors" could have a significant and adverse impact on such market
prices. SEE "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
PENNY STOCK REGULATIONS
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. The SEC
Regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. We have, at times in the
recent past, been included within the SEC Rule 3a-51 definition of a penny
stock. When our common stock is considered to be a "penny stock", trading is
covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934 for
non-Nasdaq and non-national securities exchange listed securities. Under such
rule, broker-dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. The regulations on penny stocks limit
the ability of broker-dealers to sell our Common Stock and thus the ability of
purchasers of our Common Stock to sell their securities in the secondary market.
Isonics has, from time-to-time, been subject to the penny stock regulations. SEE
"MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Our stock price may be hurt by future sales of our shares or the perception
that such sales may occur. As of the date of this Prospectus, approximately
8,793,881 shares of Common Stock held by existing stockholders constitute
"restricted shares" as defined in Rule 144 under the Securities Act. These
shares may only be sold if they are registered under the Securities Act or sold
under Rule 144 or another exemption from registration under the Securities Act.
Sales under Rule 144 are subject to the satisfaction of certain holding periods,
volume limitations, manner of sale requirements, and the availability of current
public information about us.
A substantial portion all of our restricted shares of Common Stock are
either eligible for sale pursuant to Rule 144 or have been registered under the
Securities Act for resale by the holders, including the Common Stock covered by
this Prospectus. This will permit the sale of registered shares of Common Stock
in the open market or in privately negotiated transactions without compliance
with the requirements of Rule 144. We are unable to estimate the amount, timing
or nature of future sales of outstanding Common Stock. Sales of substantial
amounts of our Common Stock in the public market may hurt the stock's market
price. SEE "SHARES AVAILABLE FOR FUTURE SALE."
EFFECT OF OUTSTANDING CONVERTIBLE PREFERRED STOCK, OPTIONS, AND WARRANTS
As of April 30, 2000, we had outstanding preferred stock convertible into
and options and warrants to purchase an aggregate of 6,684,363 shares of Common
Stock. As long as these shares of convertible preferred stock remain outstanding
and the options and warrants remain unexercised, the terms under which we could
obtain additional capital may be adversely affected. Moreover, the holders of
the convertible preferred stock, options and warrants may be expected to
exercise them at a time when we
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<PAGE>
would, in all likelihood, be able to obtain any needed capital by a new offering
of our securities on terms more favorable than those provided by these
securities. SEE "DESCRIPTION OF CAPITAL STOCK."
ANTI-TAKEOVER PROVISIONS
Our Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined by our Board of Directors. Accordingly, the Board of Directors may,
without stockholder approval, issue shares of preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of our Common Stock. Preferred stock
could also be issued to discourage, delay or prevent a change in our control,
although we do not currently intend to issue any additional series of our
preferred stock. SEE "DESCRIPTION OF CAPITAL STOCK."
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Our Bylaws provide for indemnification of officers and directors to the full
extent permitted by California law. We may be required to pay certain judgments,
fines and expenses incurred by an officer or director, including reasonable
attorneys' fees, as a result of actions or proceedings in which such officers
and directors are involved by reason of being or having been an officer or
director. SEE "SECURITIES AND EXCHANGE POSITION ON INDEMNIFICATION FOR CERTAIN
LIABILITIES."
NO DIVIDENDS ANTICIPATED TO BE PAID
We have never paid any cash dividends on our Common Stock and we do not
anticipate paying cash dividends on our Common Stock in the future. The future
payment of dividends is directly dependent upon our future earnings, capital
requirements, financial requirements and other factors to be determined by our
Board of Directors. It is anticipated that future earnings if any, which may be
generated from our operations will be used to finance our growth, and that cash
dividends will not be paid to our stockholders. SEE "MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS."
RISK OF FORWARD-LOOKING INFORMATION
We have included a significant amount of forward-looking information in this
prospectus. Because it is not possible to predict the future, there is a
significant risk that the forward-looking information will prove to be
incorrect, and perhaps materially incorrect. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS."
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<PAGE>
THE EXCHANGE OFFER
BACKGROUND OF AND REASONS FOR THE EXCHANGE OFFER
In connection with Isonics' underwritten initial public offering completed
in September 1997, an underwriter sold 810,000 Units consisting of 810,000
shares of Common Stock, and 810,000 Class A Warrants. Each Class A Warrant
entitles the holder to purchase one share of Common Stock through September 21,
2001. The Class A Warrants expire after September 21, 2001, and the Class A
Warrants will then become valueless. As of , 2000, no person has exercised
any Class A Warrants.
At the time we completed our initial public offering, we also sold 80,000
additional warrants to the underwriter (the "Underwriter Warrants"), all of
which remain outstanding. The holders of the Underwriter Warrants are entitled
to exercise these warrants by paying us $9.57 per warrant, and the holders will
then receive a single share of our common stock and a Class A Warrant. In order
for any person holding an Underwriter Warrant to participate in the exchange, he
or she will have to first exercise the Underwriter Warrant and then submit the
Class A Warrants received for exchange.
We are offering holders of outstanding Class A Warrants the opportunity to
exchange their Class A Warrants for Class B Warrants in order to encourage the
early exercise of our outstanding warrants. As an incentive to encourage
exercise, each Class B Warrant is exercisable for one share of Common Stock and
one additional Class C Warrant to purchase one share of Common Stock. Persons
who retain their Class A Warrants will be entitled to exercise their warrants
for a longer period of time than those who exchange their Class A Warrants for
Class B Warrants (since the Class A Warrants expire September 21, 2001), but
persons holding Class A Warrants after the exchange offer expires will not have
the right to obtain a Class C Warrant.
PURPOSE OF THE EXCHANGE OFFER
We are offering holders of our outstanding Class A Warrants the opportunity
to exchange their Class A Warrants for Class B Warrants. We are doing so to
encourage the earlier exercise of the outstanding warrants. As an incentive,
each Class B Warrant is exercisable for one share of Common Stock and one
Class C Warrant. Isonics also hopes that the exchange may have a positive effect
on the liquidity of and the public market for its Common Stock by increasing the
number of publicly-held shares of our common stock, although we cannot be sure
whether the exchange offer will have this or any other beneficial effect. The
following chart sets forth the principal differences between the Class A
Warrants, the Class B Warrants, and the Class C Warrants. This chart is only a
summary, and for further information you should review
- the Warrant Agreement dated September 22, 1997, between Isonics and
Continental Stock Transfer & Trust Company for the Class A Warrants, and
- the Warrant Agreement dated , 2000, between Isonics and
Continental Stock Transfer & Trust Company for the Class B and Class C
Warrants.
SUMMARY OF DIFFERENCES BETWEEN THE WARRANTS
<TABLE>
<CAPTION>
CLASS A WARRANTS CLASS B WARRANTS CLASS C WARRANTS
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Expiration Date......... September 21, 2001 Class B Warrants: Class C Warrants
, 2000 (issuable only upon the
exercise of Class B
Warrants): ,
2003
Exercise Price.......... $5.80 $5.80 $10.00
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CLASS A WARRANTS CLASS B WARRANTS CLASS C WARRANTS
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Product of Exercise..... Each person exercising a Each person exercising a Each person exercising a
Class A Warrant will Class B Warrant will Class C Warrant will
receive one share of Receive one share of receive one share of
Common Stock common stock and one common stock
Class C Warrant
Redemption Provisions... We may redeem the The Class B Warrants will We may redeem the
Class A Warrants at a not be redeemable Class C Warrants at a
price of $.10 per Warrant price of $0.10 per
on not less than 30 days' Warrant on not less than
prior written notice if 30 days' prior written
the average price of the notice if our Common
Common Stock has been at Stock trades at or above
least $14.50 per share $15.00 per share (subject
(subject to adjustment) to adjustment) for any 20
for at least 20 of 30 consecutive trading
consecutive trading days days ending not more than
ending within three days three days before the
prior to the date on notice of redemption is
which notice of deposited in the United
redemption is given. States mails.
Dilution Provisions..... The number of shares of The Class B Warrants will The Class C Warrants will
Common Stock issuable be subject to similar be subject to similar
upon exercise is subject dilution adjustment dilution adjustment
to adjustment in a number provisions provisions
of circumstances
Ability to Trade........ The Class A Warrants have A public market may A public market may
historically traded on develop for the Class B develop for the Class C
the Over-The-Counter Warrants Warrants.
Bulletin Board.
There can be no assurance There can be no assurance There can be no assurance
that the market will that a market for the that a market for the
continue. Class B Warrants will Class C Warrants will
develop or, if it develop or, if it
develops, will continue. develops, will continue
Registration............ The Class A Warrants are We expect that the We expect that the
registered under the registration of the Class registration of the Class
Securities Exchange Act B Warrants under the 1934 C Warrants under the 1934
of 1934, as amended. Act will become effective Act will become effective
on the date of this on the date of this
prospectus. prospectus.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CLASS A WARRANTS CLASS B WARRANTS CLASS C WARRANTS
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Warrant Holders are Not
shareholders............ Holders of Class A Holders of Class B Holders of Class C
Warrants are not Warrants are not Warrants are not
considered to be considered to be considered to be
Shareholders of Isonics, Shareholders of Isonics, Shareholders of Isonics,
and do not have the right and do not have the right and do not have the right
to vote at shareholders' to vote at shareholders' to vote at shareholders'
meetings or to receive meetings or to receive meetings or to receive
dividends when and if dividends when and if dividends when and if
declared. declared. declared.
</TABLE>
If all Class A Warrants are exchanged, we will issue an aggregate of 810,000
Class B Warrants (890,000 if the holders exercise the Underwriter Warrants and
exchange the Class A Warrants received). All Class A Warrants submitted for
exchange will be cancelled.
If a holder exercised his or her Class A Warrant prior to this exchange
offer, we will issue a Class C Warrant to that person for no additional
consideration.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors believes that this exchange offer is in the best
interests of Isonics and holders of Class A Warrants, and recommends that
holders of Class A Warrants participate in the exchange offer.
CONSEQUENCES OF FAILURE TO EXCHANGE.
There are no consequences if you fail to exchange your Class A Warrants
before the expiration date of the exchange offer. You will continue to own your
Class A Warrants which will be subject to the same terms and conditions as prior
to the exchange offer. After the expiration of the exchange offer, however, you
will no longer have a right to exchange your Class A Warrants for Class B
Warrants.
EXPIRATION TIME, EXTENSION, AMENDMENTS
The exchange offer will expire at 5:00 p.m., Mountain Time, on ,
20 , unless the expiration time is extended at the discretion of the Board of
Directors.
Notwithstanding the foregoing, Isonics expressly reserves the right in its
sole and absolute discretion, subject to applicable law, at any time and from
time to time,
- to delay the acceptance of the Class A Warrants for exchange,
- to terminate the exchange offer at any time (whether or not any Class A
Warrants have been accepted for exchange),
- to extend the expiration time of the exchange offer and retain all
Class A Warrants tendered, or to offer withdrawal rights on a case-by-case
basis.
- to waive any condition or otherwise amend the terms of the exchange offer
in any respect.
If this exchange offer is amended in a manner determined by Isonics to
constitute a material change, or if Isonics waives a material condition of the
exchange offer, Isonics will promptly notify the exchange agent. We will also
make a public announcement of any extension no later than 9:00 a.m., Mountain
Time, on the business day immediately following the previously scheduled
expiration date. Without limiting the manner in which Isonics may choose to make
any public announcement and subject to applicable law, Isonics shall have no
obligation to publish, advertise or otherwise
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<PAGE>
communicate any such public announcement other than by issuing a release to an
appropriate news agency. If Isonics makes a material change to the exchange
offer, we will extend the exchange to the extent required by law.
TERMS OF THE EXCHANGE AND PROCEDURE FOR SUBMITTING CLASS A WARRANTS
For each Class A Warrant validly submitted for exchange, Isonics will issue
one Class B Warrant. The terms of the Class B Warrant are as follows:
- Isonics will issue to the holder who exercises a Class B Warrant one share
of common stock and one Class C Warrant;
- The exercise price of the Class B Warrants is $5.80 per Class B Warrant
(subject to adjustment);
- The Class B Warrants will expire on , 2000 (90 days after the date
of this prospectus); and
- Because of the applicability of state securities laws, only residents of
certain states as set forth on the cover page of this prospectus are
permitted to exchange their Class A Warrants or exercise their Class B
Warrants.
As set forth above, each person who exercises a Class B Warrant (or who has
previously exercised a Class A Warrant) will receive a Class C Warrant. The
terms of the Class C Warrants are as follows:
- Isonics will issue to the holder who exercises a Class C Warrant one share
of common stock;
- The exercise price of the Class C Warrants is $ per Class C Warrant
(subject to adjustment);
- The Class C Warrants will expire on , 2003 (three years after the
date of this prospectus);
- Because of the applicability of state securities laws, only residents of
certain states as set forth on the cover page of this prospectus will be
permitted to exercise their Class C Warrants;
- The Class C Warrants will be redeemable if our Common Stock trades at or
above $15.00 per share (subject to adjustment) for any 20 of 30
consecutive trading days ending not more than three days before the notice
of redemption is deposited in the United States mails.
The Class B and C Warrants and the underlying shares of Common Stock have
been registered under the Securities Act. All share and warrant certificates
will be registered in the exact same name as the original certificates.
The exchange offer is not conditioned upon any minimum number of Class A
Warrants being submitted. As of the date of this prospectus, 810,000 Class A
Warrants were outstanding, and an additional 80,000 Class A Warrants are
issuable upon exercise of the outstanding Underwriter Warrants.
No person has any appraisal or dissenters' rights in connection with the
exchange offer. Class A Warrants, which are not submitted for exchange, or are
submitted but not accepted for exchange will remain outstanding. After this
exchange offer expires, holders of Class A Warrants will not have an opportunity
to exchange their Class A Warrants for Class B Warrants or any similar rights.
Isonics does not currently intend to make another exchange offer with respect to
any Class A Warrants outstanding after the expiration of this exchange offer.
If any Class A Warrants are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
certificates for any such unaccepted securities will be returned, without
expense, to the holder promptly after the expiration date. Holders who submit
Class A Warrants will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange offer.
17
<PAGE>
In order to make a valid delivery for exchange of Class A Warrants, a holder
must deliver the certificates representing such securities, together with a
properly completed and executed Letter of Transmittal (or copy thereof),
including all required signatures, signature guarantees, and other documents, to
the exchange agent by registered mail, return receipt requested, overnight
courier, or hand delivery as follows:
Continental Stock Transfer & Trust Co., Inc.
2 Broadway
New York, NY 10004
Attn: Compliance Department
Telephone number: 212-509-4000.
Delivery to an address and in a manner other than those indicated above does
not constitute good delivery to the exchange agent.
The method of delivery of the Letter of Transmittal and certificates to the
exchange agent will be at the election and risk of each holder of the Class A
Warrants. The Letters of Transmittal and certificates can be sent to the
exchange agent by hand delivery, courier service, or by mail. If you send the
Letters of Transmittal and certificates by mail, we recommended that you send
them by registered mail with return receipt requested; we also recommend that
you allow a sufficient number of days to ensure that the transmittal and
certificates are delivered to the exchange agent prior to the expiration time.
All questions concerning the timeliness, validity, form and eligibility of
submissions will be determined by Isonics, whose determinations will be final
and binding. Isonics in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject any purported submission. Letters of
Transmittal will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as Isonics determines
in its sole discretion. Neither Isonics nor the exchange agent will be under any
duty to give notification of any defect or irregularity in connection with the
submission of Letters of Transmittal or incur any liability for failure to give
such notification.
NO WITHDRAWAL RIGHTS
Any tender of the Class A Warrants to the exchange agent will be
irrevocable. A holder who has submitted his or her Class A Warrants for exchange
may not withdraw them. Isonics has the right, in its sole discretion, to extend
the expiration date of the exchange offer or offer withdrawal rights on a
case-by-case basis in the future.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE
The exchange of Class A Warrants for Class B Warrants will be treated as an
"exchange" for federal income tax purposes. However, under the applicable
provisions of the Internal Revenue Code, we do not expect that holders who
exchange their Class A Warrants for Class B Warrants or who receive Class C
Warrants following exercise of their Class A Warrants will recognize any gain or
loss.
The exchange of Class A Warrants for Class B Warrants with terms identical,
except for the expiration date, to those of the Class A Warrants and the filing
of a registration statement with respect to the resale of the Class B and C
Warrants will not be a taxable event to holders of the warrants. After the
exchange, a holder's basis in the Class B or C Warrants received in the exchange
will be the same as the basis the holder had in the securities surrendered in
the exchange.
The above discussion summarizes the expected tax effects of the exchange,
although there is no definitive guidance on point. The IRS could disagree with
the conclusions reached by Isonics. In the event of such disagreement, there is
no assurance that the IRS would not prevail in a judicial or
18
<PAGE>
administrative proceeding. As a result of the complexity of the tax laws and the
impact of each holder's particular circumstances upon the tax consequences of
the merger, the information set forth above regarding the federal income tax
consequences of the merger is not intended to be individualized tax or legal
advice to holders. Each holder considering participation in the exchange offer
should consult his or her own tax or financial counsel as to the specific
federal, state, and local tax consequences of the exchange, if any, to such
holder.
PARTICIPATION BY DIRECTORS AND OFFICERS IN THE EXCHANGE OFFER
No directors or officers of Isonics beneficially own any Class A Warrants.
ISSUANCE OF NEW CERTIFICATES
Certificates representing Class B Warrants, and in some cases, Class C
Warrants will be delivered to participating holders as soon as practicable.
LOST CERTIFICATES
If you have lost or misplaced your certificates representing Class A
Warrants or if they have been destroyed, contact the exchange agent for
additional information on the replacement and exchange of your Class A Warrants.
You may be required to provide an indemnity bond in connection with the
replacement of lost or destroyed certificates.
REQUESTS FOR ADDITIONAL INFORMATION
If you have questions or require additional information concerning the
offering, please contact the following person at the address and telephone
number stated below:
Brantley J. Halstead, Vice President--Finance
Isonics Corporation
5906 McIntyre Street
Golden, CO 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300
e-mail: [email protected]
USE OF PROCEEDS
Isonics will not receive any cash proceeds from the exchange of the Class A
Warrants or the issuance of the Class B Warrants.
Isonics will receive from $0.00 to a maximum of $4,698,000 from the exercise
of Class B Warrants (not including any securities issuable upon exercise of the
Underwriter Warrants).
If all of the Class B Warrants are exercised (of which we can offer no
assurance), there will be 810,000 Class C Warrants outstanding. We will receive
from $0.00 to a maximum of $8,100,000 from the exercise of the Class C Warrants.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
THE STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT PURELY HISTORICAL
ARE FORWARD LOOKING STATEMENTS. "FORWARD LOOKING STATEMENTS" INCLUDE STATEMENTS
REGARDING OUR EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE
FUTURE. FORWARD LOOKING STATEMENTS INCLUDE: STATEMENTS REGARDING FUTURE PRODUCTS
OR PRODUCT DEVELOPMENT; STATEMENTS REGARDING FUTURE SELLING, GENERAL AND
ADMINISTRATIVE COSTS AND RESEARCH AND DEVELOPMENT SPENDING AND OUR PRODUCT
DEVELOPMENT STRATEGY; STATEMENTS REGARDING FUTURE CAPITAL EXPENDITURES AND
FINANCING REQUIREMENTS; AND SIMILAR FORWARD LOOKING STATEMENTS. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO US ON THE DATE HEREOF, AND WE UNDERTAKE NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
Founded in 1992, Isonics Corporation is a specialty chemical and advanced
materials company, which develops and commercializes products based on stable
isotopes. Stable isotopes are ultra pure materials engineered at the molecular
level to provide enhanced performance properties in semiconductors, lasers and
high performance lighting and energy production. Stable isotopes are also widely
used in basic research, pharmaceutical development and drug design, as well as
in medical diagnostics and imaging. By replacing materials traditionally used in
these industries with isotopically engineered versions of the same materials,
product performance, safety, and economics can be enhanced significantly. Using
state-of-the-art technology, we produce a wide range of enriched stable
isotopes, which are then converted into products, which meet the specialized
needs of our customers.
Originally, our core business was the production and supply of depleted
zinc, a non-radioactive stable isotope, to the nuclear energy industry. In
fiscal 1996, we expanded our business scope to include development of
isotopically engineered materials for the medical research, medical diagnostic,
and semiconductor industries. The acquisition of Chemotrade GmbH ("Chemotrade")
in 1998 added radioactive isotopes (or radioisotopes) to our available products.
As a result of our sale of our depleted zinc business in December 1999, as
discussed below, our future revenues will depend on our success in developing
and selling products in the semiconductor and stable and radioactive isotope
markets.
International Process Research Corporation ("Interpro", doing business as
Colorado Minerals Research Institute) is a contract research and development and
materials processing company and is developing new, lower cost technologies to
better meet our customers' needs. Interpro generates the majority of its
revenues from contract research and process development engagements.
Chemotrade is headquartered in Dusseldorf, Germany, and its subsidiary is
located in Leipzig, Germany. Chemotrade is a value-added re-seller of stable and
radioactive isotopes. It supplies radioisotopes for pharmaceutical and
industrial research, as well as for industrial and medical imaging, calibration
sources and for brachytherapy applications. Chemotrade also distributes
calibration sources, manufactured by duPont with Chemotrade supplied
radioisotopes, in Germany and other European countries.
Additionally, Chemotrade supplies various stable isotope labeled compounds
for pharmaceutical research and drug design, as well as oxygen-18 for use in
producing a radioisotope used in positron emission tomography. Chemotrade's
market is primarily Europe but sales are also made to North America and Asia.
Prior to June 1998, substantially all of our net revenues in any particular
period were attributable to a limited number of customers and sales of depleted
zinc and other stable isotopes. We have historically operated with little
backlog. With the acquisition of Chemotrade we added radioisotopes to our
product mix, and consistent with our historical experience, our quarterly
results have been
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materially affected by the size, timing and quantity of orders and product
shipments during a given quarter.
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for approximately $8,200,000 of which
$6,700,000 was paid on December 1, 1999. Additionally, we signed a long-term
isotope supply agreement with Eagle-Picher, and Eagle-Picher separately agreed
to supply us with 200 kilograms of silicon-28 in 2000 in exchange for a warrant
to purchase 4,000,000 shares issued at that time to Eagle-Picher. As a result,
we anticipate lower revenues in future quarters and a lost or delayed sale of
radioisotopes could have a significant impact on our operating results for a
particular period, and such fluctuations could materially and adversely affect
our business, financial condition and results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of net revenues. The table and the
discussion below should be read in conjunction with the financial statements and
the notes thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
APRIL 30, JANUARY 31,
---------------------- ----------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues.................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 68.7 78.7 80.9 79.1
----- ----- ----- -----
Gross margin.................................. 31.3 21.3 19.1 20.9
Operating expenses:
Selling, general and administrative......... 19.8 21.4 17.1 28.0
Research and development.................... 12.0 6.8 6.7 8.3
Restructuring & office closure.............. -- 4.1 4.9 0.5
----- ----- ----- -----
Total operating expenses...................... 31.8 32.3 28.7 36.8
----- ----- ----- -----
Operating income (loss)....................... (0.5) (11.0) (9.6) (15.9)
Other income (expense), net................... (2.1) (2.8) (1.3) 44.6
----- ----- ----- -----
Income (loss) before extraordinary item and
income taxes................................ (2.6) (13.8) (10.9) 28.7
Income tax (expense) benefit.................. 4.6 (1.0) 1.4 4.2
----- ----- ----- -----
Income (loss) before extraordinary item....... 2.0 (14.8) (12.3) 24.5
Extraordinary item--loss on extinguishments of
debt........................................ (3.7) (0.0) (0.0) (0.0)
----- ----- ----- -----
Net income (loss)............................. (1.7)% (14.8)% (12.3)% (24.5)%
===== ===== ===== =====
</TABLE>
NET REVENUES
Net revenues increased from $6,783,000 in fiscal 1998 to $16,998,000 in
fiscal 1999, an increase of $10,215,000 or 151%. The increase is primarily due
to additional net revenues from the Interpro and Chemotrade acquisitions.
Interpro 1999 revenues were $2,614,000. Chemotrade's fiscal 1999 revenue was
$10,181,000. As a result of the sale of the depleted zinc business to
Eagle-Picher on December 1, 1999, revenues will be decreased on an annual basis
by approximately $6,000,000. The impact on the fiscal year ended April 30, 2000,
should be somewhat less as the sale occurred seven months into the fiscal year.
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<PAGE>
Net depleted zinc revenues for fiscal 1999 increased by approximately
$323,000 from fiscal 1998 revenues of $5,636,000, on comparable unit sales.
Average unit sales prices of depleted zinc decreased slightly from fiscal 1998
to fiscal 1999 due to less-refined product being sold during fiscal 1999. Net
revenues for stable isotope labeled compounds (also known as "SILCs") in fiscal
1999 were approximately $2,599,000, an increase of approximately $1,492,000, or
135% from fiscal 1998. The revenue growth reflects the increasing demand for
SILCs, specifically enriched carbon and oxygen products; however, our revenue
from SILCs is limited by the available supply of enriched carbon and oxygen
products. We have and intend to continue to develop relationships with potential
producers of SILCs, such as the Institute of Stable Isotopes in Tblisi, Georgia,
to meet the growing demand for our SILC products.
Net revenues for the nine months ended January 31, 2000, were $11,115,000, a
decrease of approximately 22% or $3,194,000 from $14,309,000 for the same period
in the prior fiscal year. The decrease is because our net revenues from contract
research and development engagements and other sources of sales decreased
approximately $1,301,000 for the nine months ended January 31, 2000, to
approximately $1,017,000 from approximately $2,318,000 in the comparable period
of the prior year. Net revenues from isotope product sales also decreased
approximately $1,893,000 for the nine months ended January 31, 2000, to
approximately $10,098,000 from approximately $11,991,000 in the comparable
period of the prior year. Net revenues from radioisotope sales decreased
approximately $513,000 for the nine months ended January 31, 2000, compared to
the nine months ended January 31, 1999, to approximately $5,001,000. Net
revenues from stable isotope sales decreased approximately $1,380,000 for the
nine months ended January 31, 2000, compared to the nine months ended
January 31, 1999, to approximately $5,097,000. Net revenues from stable isotopes
and radioisotope sales varied because of the timing and size of large depleted
zinc and radioisotope sales orders and shipments. Because of the Eagle-Picher
transaction there were no significant depleted zinc sales in the last two months
of the nine-month period ended January 31, 2000, and there will be no revenues
from the sale of depleted zinc for the remainder of the fiscal year ending
April 30, 2000.
International sales represented approximately 60% of revenues in fiscal 1999
and less than 10% of net revenues for fiscal 1998. This substantial increase is
primarily attributable to our acquisition of Chemotrade.
We do not anticipate significant revenues from sales of silicon-28 based
products in the fiscal year ended April 30, 2000. We are collaborating with
academia and industry to evaluate the benefits of isotopically pure silicon-28.
We believe that if evaluations demonstrate the commercial feasibility of one or
more products, demand could emerge in certain segments of the semiconductor
market. We can offer no assurance, however, that these evaluations will
demonstrate the commercial feasibility of any products, that we will be able to
commercialize any such products, or that a market will emerge for any such
products.
GROSS MARGIN
As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, gross margin will be decreased on an annual basis by
approximately $1,000,000. The impact on the fiscal year ended April 30, 2000
should be somewhat less as the sale occurred seven months into the fiscal year.
As a percentage of revenues gross margin should not change significantly.
Gross margin decreased to approximately 21.3% in fiscal 1999 from 31.3% in
fiscal 1998. The decrease is because of reduced unit sales prices of depleted
zinc, the increased proportion of net revenues generated from contract
manufacturing performed by Interpro, and stable and radioisotope revenues
generated by Chemotrade which typically have lower margins. Additionally, the
entrance to the oxygen-18 market has been achieved by pursuing market share over
margin. Gross margin for the nine months ended January 31, 2000, increased to
approximately 20.9% of net revenues from
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approximately 19.1% for the same period in the prior fiscal year. The increase
is primarily because of a change in product mix sold during the nine month
period as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased on a dollar basis by
approximately $2,300,000 to $3,600,000, or 21.4% of net revenues for fiscal 1999
from approximately $1,300,000 or 19.8% of net revenues for fiscal 1998. The
dollar increase in selling, general and administrative expenses is primarily
attributable to the acquisitions of Interpro and Chemotrade.
As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, selling, general and administrative expenses will be decreased
on an annual basis by approximately $100,000. The impact on the fiscal year
ended April 30, 2000 should be somewhat less as the sale occurred seven months
into the fiscal year. We anticipate that, in general, selling, general and
administrative expenses will remain relatively stable because of cost controls
implemented throughout Isonics during the past twelve months. As a percentage of
revenues selling, general and administrative expenses should increase, as
revenues will be significantly lower.
Selling, general and administrative expenses increased $673,000 or 27.5% to
approximately $3,117,000, or approximately 28.0% of net revenues for the nine
months ended January 31, 2000, from $2,444,000, or 17.1% of net revenues in the
comparable period of the prior year. The dollar increase for the nine months
ended January 31, 2000, was primarily attributable to increased usage of
professional services including legal, business development and accounting
services, and compensation expense related to bonuses paid to certain members of
senior management because of profitability achieved in the quarter. The same
factors and lower revenues primarily caused the percentage increase.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by approximately $344,000 or
42.4% for fiscal 1999, while declining on a percentage basis to 6.8% of net
revenues in fiscal 1999, from 12.0% of net revenues in fiscal 1998. The dollar
increase during fiscal 1999 is primarily because of increased costs associated
with the development of isotopically pure silicon wafers and development costs
incurred at Interpro. The decrease in research and development expenses as a
percentage of net revenues from fiscal 1998 to fiscal 1999 was because of
revenue growth associated with our acquisitions. We believe that the development
and introduction of new product applications is critical to our future success
and expect that research and development expenses will remain stable (as
measured in dollars) in the near term because of the timing of material usage
and outside services, but may vary as a percentage of revenues.
Research and development expenses will not be significantly affected by the
sale of the depleted zinc business to Eagle-Picher on December 1, 1999, because
we had not spent significant funds on depleted zinc research and development in
the last fiscal year, and did not have plans for any significant future research
and development expenditures. However, as a percentage of revenues research and
development expenses should increase, as revenues will be significantly lower.
As described above, we signed a long-term isotope supply agreement with
Eagle-Picher, and Eagle-Picher is obligated to supply us with 200 kilograms of
silicon-28 in 2000. The silicon-28 will be used to further development of our
semiconductor materials business. The anticipated value of the 200 kilograms is
approximately $5,000,000. Since we purchased the 200 kilograms of silicon-28 by
issuing a warrant to Eagle-Picher to purchase 4,000,000 shares of stock as we
use the silicon-28, we will recognize an expense of $25 per gram of silicon-28
received. This is the price we most recently paid for silicon-28 from another
supplier.
23
<PAGE>
Research and development expenses decreased by approximately $43,000, or
approximately 4.5%, to $919,000 for the nine months ended January 31, 2000, from
$962,000 for the comparable period in fiscal 1999, while increasing on a
percentage basis to approximately 8.3% of net revenues from approximately 6.7%.
The percentage increase during the nine months ended January 31, 2000, was
primarily because of lower revenues as described above. The absolute dollar
expenditures are comparable year over year, however, more emphasis is now being
placed on semiconductor materials development.
We believe that the development and introduction of new product applications
are critical to our future success and we expect that research and development
expenses will increase (as measured in dollars), in the near term because of the
timing of material usage and outside services, but will likely continue to vary
as a percentage of revenues because of the timing and amount of future revenues.
RESTRUCTURING AND OFFICE CLOSURE
On October 31, 1998, we announced a restructuring of our operation and
relocation of our headquarters to Golden, Colorado, the location of our
subsidiary, Interpro. We originally recorded a $708,000 charge in connection
with the restructuring.
As of January 31, 2000, the only significant restructuring cost remaining is
the lease payments on the former San Jose, California office, which has been
sublet for the remaining term of our lease. The net liability is estimated to be
approximately $51,000 and will be incurred over the next four years. The $60,000
expense in the nine months ending January 31, 2000, was primarily related to
moving costs incurred by two senior executives.
OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income and expense,
amortization of debt issuance costs and the fair value of warrants issued in
connection with debt, and foreign currency gains and losses. Other expense, net
increased by approximately $339,000 to $484,000 for fiscal 1999. The increase
was the result of foreign currency gains from liabilities denominated in German
Deutsche Marks due to the sellers of Chemotrade which was offset by a
significant increase in interest expense including charges for the fair value of
warrants and common shares issued in connection with debt and debt conversions.
Other income (expense), net increased by approximately $5,142,000, to
$4,962,000, for the nine months ended January 31, 2000, from other income
(expense), net of approximately $(180,000), for the comparable period of the
previous fiscal year. The Eagle-Picher transaction resulted in $5,172,000 in
other income. Additionally, an increase in other income of approximately
$112,000 was due to a favorable settlement of an outstanding contingency.
Foreign currency exchange losses increased by approximately $99,000 for the nine
months ended January 31, 2000.
Interest expense is expected to be significantly lower in future periods as
several notes payable were paid with a portion of the cash proceeds received
from the sale of the depleted zinc business to Eagle-Picher on December 1, 1999.
INCOME TAXES
The income tax benefit was $314,000 for fiscal 1998 and the effective rate
of 177% relates to the realization of deferred tax assets associated with the
purchase of Interpro and the reduction of the previously recorded valuation
allowance. The consolidated entity had an income tax expense of $171,000 for
fiscal 1999. Because the Chemotrade subsidiary had net income, income taxes were
paid in Germany. The two United States-based entities both had net losses and
did not owe income taxes. A valuation allowance has been provided against all
deferred tax assets, which relate primarily to net operating loss and research
and development credit carryforwards. We are exploring various tax minimization
strategies in an effort to conserve future cash flows.
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<PAGE>
We realized a gain on the sale of our depleted zinc business of
approximately $5,172,000. The tax effect of this sale, net of tax loss
carryforwards available is estimated to be approximately $435,000. Additionally,
there was income tax expense for the quarters ended January 31, 2000, and
January 31, 1999, of $35,000 and $177,000 respectively, and income tax expense
for the nine months ended January 31, 2000 and 1999, of $36,000 and $197,000
respectively related to income generated by our Germany-based subsidiary,
Chemotrade.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, our liquidity has been significantly improved.
Since inception, our principal sources of funding have been cash from
operations, borrowed funds and sales of Common Stock. We generated cash in
operating activities of approximately $357,000 during fiscal 1999, as compared
to a use of cash of $539,000 in fiscal 1998. During the nine months ended
January 31, 2000, we used approximately $2,904,000 in operating activities, as
compared to $146,000 generated in operating activities during the first nine
months of fiscal year 1999.
Positive influences on fiscal 1999 cash flow included
- a decrease in accounts receivable of $1,748,000;
- non-cash charges for depreciation and amortization expense of $520,000;
and
- non-cash charges for the loss on disposal of property (restructuring
related) of $504,000.
In addition to the net loss of $2,521,000 we recognized for fiscal year
1999, other negative influences on our cash flow from operations were a decrease
in accounts payable $112,000 and an increase in inventory of $89,000.
At April 30, 1999, we had approximately $452,000 of cash equivalents, a
decrease of $592,000 compared to $1,044,000 at April 30, 1998. At April 30,
1999, we had negative working capital of approximately $2,317,000, a decrease of
$4,128,000 compared to working capital of $1,811,000 at April 30, 1998. The
decrease is primarily the result of our cash payments for the acquisition of
Chemotrade and the losses incurred for fiscal 1999. During fiscal 1999, we paid
the sellers of Chemotrade approximately $1,686,000 in cash, and had one note for
approximately $826,000 outstanding due to the sellers on June 1, 1999, of which
approximately $500,000 was repaid and approximately $326,000 was extended until
July 2000 and has been subsequently repaid.
At January 31, 2000, we had approximately $4,576,000 of cash and cash
equivalents, an increase of approximately $4,124,000, compared to $452,000 as of
April 30, 1999. At January 31, 2000, we had positive working capital of
approximately $4,067,000, an increase of approximately $6,384,000 from negative
working capital of approximately $2,317,000 April 30, 1999. The increase is
primarily the result of proceeds from the issuance of preferred stock in
July 1999 and the Eagle-Picher transaction.
Our principal sources of funding have been cash from borrowed funds and
sales of preferred stock. We used cash in operating activities of approximately
$2,904,000 and generated cash of $146,000, during the nine months ended
January 31, 2000, and 1999, respectively. Cash used in operating activities
during the nine months ended January 31, 2000 was principally the result of a
net loss of approximately $2,454,000 before the gain of approximately $5,172,000
resulting from the Eagle-Picher Transaction, and increase in net operating
assets. Cash generated by operating activities during the nine months ended
January 31, 1999, was principally the result of a net loss of $1,757,000,
reduced by non-cash charges and decreases in net operating assets.
Financing activities used cash of $244,000 in fiscal 1999, and provided cash
of $1,621,000 during fiscal 1998. Financing activities generated cash of
$318,000 during the nine months ended January 31,
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<PAGE>
2000 and used cash of $296,000 during the comparable period of the prior fiscal
year. In fiscal 1999, the primary use of cash was the excess of repayments of
debt, $1,000,000 over proceeds of debt, $701,000. In fiscal 1998, the primary
source of cash was the issuance of Common Stock, $3,452,000 versus the use of
cash for payments of debt, $1,852,000. During the nine months ending
January 31, 2000, our principal source of cash from financing activities was the
issuance of convertible preferred stock in July 1999 for cash of $2,250,000 and
proceeds from the issuance of long-term debt of $75,000. Net repayments on our
revolving line of credit amounted to $513,000 during the nine-month period, and
we repaid additional debt during that period of approximately $1,494,000, each
resulting in a reduction in the net amount of cash received from financing
activities. Cash used during the nine months ended January 31, 1999, resulted
primarily from repayments of debt of $1,714,000, offset by net borrowings on the
revolving line of credit of $931,000 and proceeds of $500,000 from the issuance
of long-term debt.
On July 29, 1999, we completed a private placement financing to accredited
investors and certain creditors valued in total at approximately $2,700,000. We
issued 1,830,000 units, each consisting of one share of Series A Convertible
Preferred Stock and one warrant. We received $2,250,000 in cash proceeds and
converted $425,000 of long-term debt in connection with the private placement.
Each share of the Series A Convertible Preferred Stock is convertible into one
share of our Common Stock at a conversion price of $1.50. The liquidation
preference for the Series A Convertible Preferred Stock is $1.50. Each warrant
allows the investor to purchase one share of Isonics Common Stock for $3.75
through July 29, 2002. We granted certain registration rights to the holders of
the shares of common stock underlying the Class A Convertible Preferred Stock
and the warrants.
In addition to converting $425,000 of existing debt into equity as part of
the private placement we:
- Issued 500,000 warrants to purchase shares of our Common Stock to an
investment banker as a commission on this placement. The warrants are
exercisable at $3.75 per share through July 29, 2002.
- Issued 46,667 units in satisfaction of all current and future obligations
under the Isoserve royalty agreement.
- Extended the payment due date for the remaining balance on the Chemotrade
acquisition note to July 2000.
- Extended the payment due date for certain unsecured promissory notes to
January 2000, which notes have been paid in full.
Our investing activities used cash of approximately $705,000 and $66,000
during fiscal 1999 and 1998, respectively, and generated cash of approximately
$6,710,000 for the nine months ended January 31, 2000. Investing activities in
fiscal 1998 were primarily for purchases of property and equipment. Uses of cash
in fiscal 1999, include approximately $159,000 for property and equipment, and
$546,000 net cash used in the Chemotrade acquisition. The significant positive
cash flow from investing activities in the first nine months of fiscal 2000 was
principally the result of the completion of the Eagle-Picher transaction. Our
investing activities used cash of $666,000 for the nine months ended
January 31, 1999, primarily for purchases of property and equipment and $546,000
was also used during the nine months ended January 31, 1999 for the purchase of
our subsidiary Chemotrade.
On July 24, 1998, we obtained a $3,000,000 asset based credit facility for
our U.S. operations, secured by our U.S. assets, with an unaffiliated lender.
This facility was repaid, in full, in December 1999 with funds made available by
our sale of assets to Eagle-Picher. The proceeds of that facility were used to
repay approximately $537,000 of debt outstanding and $742,000 of accounts
payable. Chemotrade has one unsecured revolving line of credit for 400,000 DM
(approximately $220,000 (US) at April 30, 1999 and approximately $200,000 (US)
at January 31, 2000). We are evaluating alternative secured credit facilities
for Chemotrade.
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At April 30, 1999, and subsequently until December 1, 1999, we were in
default of our borrowing agreements with Coast Business Credit ("Coast"), and on
December 1, 1999, we had approximately $215,000 of outstanding borrowings. We
have used some of the proceeds of the depleted zinc business sale described
above to pay off the Coast borrowings and our relationship with Coast has been
terminated.
We believe that our current cash position, attributable to the proceeds
received from the sale of our depleted zinc business and the reduced levels of
debt associated therewith, will be sufficient to fund operations for more than
the next twelve months. However, our long-term capital requirements will only be
met if we are able to generate profits from operations and positive cash flows,
or develop new sources of financing of which there can be no assurance.
BUSINESS
Isonics Corporation is an advanced materials and technology company which
develops and commercializes products based on enriched stable isotopes. Stable
isotopes can be thought of as extremely pure materials. This high degree of
purification accomplished on the sub-atomic level provides enhanced performance
properties compared to normal purity materials. Stable isotopes have commercial
uses in several areas, including: energy; medical research, diagnostics and drug
development; product tagging and stewardship; semiconductors; and optical
materials. We have successfully developed and commercialized several isotope
products and intend to promote the emergence and growth of new stable isotope
applications.
Our principal product through November 1999 was isotopically depleted zinc.
Depleted zinc is used to prevent corrosion in nuclear power plants. Corrosion is
a cause of high radiation fields in such plants and can result in radiation
exposure to workers. Depleted zinc also reduces environmental cracking in
certain kinds of nuclear reactors, which if not controlled, can require
extremely costly repairs, or possibly result in premature shutdown and
de-commissioning of the facility. However, in December 1999, we sold our
depleted zinc business to Eagle-Picher Technologies, LLC.
New applications for stable isotopes are continually being developed by us
and by third parties. We believe that new applications have the potential to
create new markets. One of these new applications for stable isotope labeled
compounds is the diagnostic breath test ("DBT") market. DBTs provide early
diagnosis of conditions that could otherwise lead to expensive procedures such
as endoscopies and biopsies. DBTs under development by third parties that
utilize stable isotopes in their application include tests to diagnose peptic
ulcers, gastric emptying, fat malabsorption and liver function. Two DBTs,
relating to peptic ulcers, have been approved by the U.S. Food and Drug
Administration (the "FDA"). We believe that other companies have applied to the
FDA or comparable agencies in foreign countries for approval of these and other
tests. FDA approval must be obtained before DBTs can be sold in the United
States.
The rare, stable isotope of carbon is carbon-13. Carbon-13 is the key
ingredient for most DBTs. We believe that we are the third largest supplier of
carbon-13 in the world, and are the only non-Japanese owned supplier. To further
strengthen this position, in February 1998, we formed a joint venture with the
Institute of Stable Isotopes in Tblisi, Georgia. The purpose of the joint
venture was to increase carbon-13 production at the Institute initially, and
then to transfer that production technology to manufacturing facilities to be
established in Europe and North America. Our carbon-13 production capacity does
not presently meet our anticipated requirements. Consequently, in
December 1999, we entered into an agreement with Eagle-Picher
Technologies, LLC, to purchase carbon-13 from their Oklahoma-based facility. To
date this facility has not produced any carbon-13, or other carbon isotopes of
sufficient enrichment to be of commercial interest to us. We believe production
of enriched carbon isotopes from this facility will commence in 2000. We are
also investigating other sources of supply of carbon-13.
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<PAGE>
We are collaborating with academia and industry to evaluate the benefits of
isotopically pure silicon-28. One of the properties of isotopically pure
silicon-28 is its high thermal conductivity, which we are currently researching
for use in semiconductor applications. We believe that if evaluations
demonstrate the commercial feasibility of one or more products, demand could
emerge in certain segments of the semiconductor market. We can offer no
assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products, that we will be able to commercialize any such
products, or that a market will emerge for any such products. According to the
Semiconductor Industry Association, sales in 1998 of silicon wafers and other
semiconductor substrates were over $7 billion.
Improved thermal conductivity of a thin film of isotopically pure silicon-28
was demonstrated by a researcher at Brown University in 1997. Based on our
preliminary research, the 60% improvement in conductivity at room temperature
was in line with our expectations. Since 1994, we have been working to produce
isotopically pure silicon-28 epitaxial wafers suitable for the manufacture of
semiconductor devices. Epitaxial wafers are made by taking an existing silicon
wafer and then growing a thin surface layer of silicon using chemical vapor
deposition.
In fiscal 1999, we acquired an exclusive license relating to two Yale
University patents, which cover semiconductor devices made of isotopically pure
silicon, germanium, gallium arsenide and most isotopically pure compound
semiconductors. The patents claim that isotopic purity provides improved device
speed and improved thermal conductivity, two properties that are of great
importance to the semiconductor industry. We believe we have achieved this goal
as evidenced by our shipments of epitaxial wafers in fiscal 1999.
We were formed in March 1992, as a partnership, and were subsequently
incorporated in California in March 1993, as A&R Materials, Inc. In
September 1996, we changed our name to Isonics Corporation. Our principal
executive offices are located at 5906 McIntyre Street, Golden, Colorado 80403.
Our telephone number is (303) 279-7900, and our facsimile number is
(303) 279-7300. You can find our web site at http://www.isonics.com.
RECENT BUSINESS ACQUISITIONS
INTERNATIONAL PROCESS RESEARCH CORPORATION
Effective April 30, 1998, we purchased all of the outstanding capital stock
of International Process Research Corporation ("Interpro") from a previously
unaffiliated corporation (Metallurgy International, Inc.) Interpro, which does
business as Colorado Minerals Research Institute, is a contract research and
development, and materials processing company. Interpro performed (through
December 1, 1999) key steps in our depleted zinc manufacturing process. Interpro
is also jointly developing new, lower-cost technologies to enable us to better
meet customer needs. The acquisition was made to assure future availability of
this critical manufacturing technology, and to provide an infrastructure
platform for performing value-added processing of other isotopes. Our
consolidated balance sheets at April 30, 1999 and 1998 include the assets and
liabilities of Interpro. Our consolidated statement of operations includes
Interpro only for fiscal 1999 since the acquisition occurred on the last day of
fiscal 1998. In connection with the acquisition, we issued 353,982 shares of our
Common Stock (valued at $708,000) in exchange for all of the outstanding shares
of Interpro. We accounted for the acquisition as a purchase.
CHEMOTRADE GMBH
Effective June 1, 1998, we acquired all of the outstanding shares of
Chemotrade GmbH, 75% of the outstanding shares of Chemotrade Leipzig GmbH and 6%
of the outstanding shares of IUT (collectively "Chemotrade"). All three
companies are located in Germany. Chemotrade GmbH is located in Dusseldorf,
Chemotrade Leipzig GmbH is located in Leipzig, and IUT is located in Berlin. All
three companies were owned by two common shareholders. All three companies
continue to be
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engaged in the distribution, development and manufacture, of stable and
radioactive isotopes. We paid the unaffiliated former owners of Chemotrade
$758,000 in cash, 357,730 restricted shares of our Common Stock valued at
$894,000, and two interest bearing notes, one for $924,000 which was paid in
September 1998, and a second note for $826,000 which was partially paid in
June 1999, with the balance due in July 2000.
The sellers guaranteed Chemotrade's defined pre-tax earnings during the
sixteen months ended April 30, 1999, and the twelve months ended April 30, 2000,
and 2001. Chemotrade met the initial pre-tax earnings goal for the sixteen
months ended April 30, 1999. If the defined pre-tax earnings for 2000 and 2001
are met, the sellers will receive additional consideration of $271,000. If the
defined pre-tax earnings are not met, the consideration will be reduced.
BUSINESS THAT WE SOLD
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for $8,200,000, including $1,500,000 to be
paid over a period of three years. Eagle-Picher's obligation to pay the final
$1,500,000 is subject to certain contingencies. We received cash of
approximately $6,700,000 from Eagle-Picher at the closing, of which
approximately $1,200,000 was used to pay certain accrued liabilities.
The Agreement executed between us and Eagle-Picher provides for:
(1) Our sale of the depleted zinc business to Eagle-Picher for a purchase
price including approximately $6,700,000 in cash plus three additional
payments of $500,000 over the next three years, and
(2) Eagle-Picher's sale to us of 200 kilograms of silicon-28 in
consideration for a forty-two (42) month Warrant grant to Eagle-Picher
for the purchase of 4,000,000 shares of our Common Stock at purchase
price of $3.75 per share. The Warrant is subject to a registration rights
agreement. The number of shares issuable upon exercise of the Warrant can
be reduced if Eagle-Picher is unable to supply the full 200 kilograms of
silicon-28 during calendar year 2000. Eagle-Picher exercised the warrants
in March 2000 under a "net-exercise' provision entitling it to receive
3,130,435 shares of common stock. These shares are subject to reduction
to the extent Eagle-Picher does not deliver the required 200 kilograms.
Eagle-Picher claims that we should issue it an additional 155,279 shares
pursuant to the net exercise provision, but we believe its calculation is
in error, and we are continuing discussions with representatives of
Eagle-Picher.
Related to, but separate from, the sale of the depleted zinc business and
the purchase of the 200 kilograms of silicon-28, we contemporaneously signed a
ten-year Supply Agreement by which we will have the exclusive right to purchase
quantities of isotopically pure silicon-28, silicon-29, and silicon-30, and a
non-exclusive right to purchase quantities of isotopically pure carbon-12 and
carbon-13 produced by Eagle-Picher from its Oklahoma-based facilities. The
Supply Agreement locks-in what we believe is a favorable purchase price for the
aforementioned isotopes. As partial consideration for the exclusivity provision,
we agreed to pay Eagle-Picher a fee equal to 3.0% of the net revenues from all
sales made by us of products incorporating enriched silicon isotopes supplied by
Eagle-Picher.
BACKGROUND
An isotope is one of two or more species of the same chemical element, which
differ from one another only in the number of neutrons in the nucleus of the
atom. The different number of neutrons can create significantly different
nuclear physics characteristics. To take advantage of some of these different
characteristics, it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope. There are over 280
naturally occurring stable isotopes of
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83 elements. Some elements have only one naturally occurring stable isotope,
while others have many. Stable isotopes are not radioactive.
Stable isotopes of an element differ in mass and diameter, as well as
several nuclear properties, such as cross-section, spin and magnetic moment.
Differences in these properties can result in substantially different effects,
and some of these differences have the potential for commercial application. For
example, in ultra chemically pure crystals grown for electronics or optical
applications, isotopic impurities are the greatest contributor to crystal
disorder because of mass and diameter variations. Eliminating this disorder by
using a single enriched isotope (i.e. isotopically pure substance) results in
increased thermal conductivity and optical transparency, and thus in improved
product performance. Similarly, enriching or depleting isotopes based upon their
cross-sections allows materials to be engineered for applications in the nuclear
power industry, for controlled doping of some semiconductors in the computer
industry, and for use as targets to produce radioisotopes for the medical and
other industries.
Stable isotopes of an element do not differ significantly in their chemical
behavior. By varying the natural abundance of isotopes present in the material
it can be "Tagged". Varying the natural abundance gives a material its own
unique mass or nuclear magnetic signature. Most importantly, tagging in this
manner does not change a given material's chemical properties. Though chemically
equivalent, the "tagged" or labeled material is discernible from its unlabeled
twin through the use of several types of instruments called spectrometers.
COMPANY STRATEGY
We believe that our strength is the ability to bring the necessary
ingredients together to identify, evaluate, develop, engineer, and successfully
commercialize applications for stable isotopes and value-added products
manufactured from stable isotopes. This is evidenced by management's experience
(at Isonics and in prior employment) in developing depleted zinc from what was
initially a cost prohibitive concept to a commercial product. The worldwide
market for depleted zinc is now one of the largest for a stable isotope product.
We believe we have created a product development model that can serve as a
basis for our current and future expansion. To capitalize on the commercial
opportunities that have been identified for stable isotopes, we have adopted a
business strategy designed to maximize the value of our technologies, business
development and management resources, while attempting to minimize capital
costs. This strategy involves:
- focusing on development of high value-added products, which have a
competitive advantage in large or growing markets;
- leveraging research and development expenditures through collaborations,
government programs and corporate partnerships;
- minimizing early capital needs by obtaining stable isotopes through
alliances and supply agreements with existing stable isotope sources,
followed by investment in company-owned isotope production facilities when
markets are more established and the optimum production technology has
been determined;
- obtaining value-added processing technology through sub-contract
manufacturing agreements, joint ventures and acquisitions of strategically
important technologies and companies; and
- developing a time-balanced product pipeline to provide a continual supply
of new business opportunities.
PRODUCTS. Depleted zinc sales have historically been our most significant
source of revenues. However, in fiscal 1999, our revenues were generated from a
more broad range of sources, including
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depleted zinc sales (approximately 35%), radioisotopes sales (approximately
34%), and other stable isotopes sales including our newly introduced silicon-28
isotope (approximately 15%). The balance of our revenues comes from the
operations of our subsidiary, International Process Research Corporation
(approximately 16%), who performs metallurgical and mineral processing contract
research and process analysis test work. Because we sold our depleted zinc
business in December 1999, depleted zinc will continue to be a significant
contributor to our revenues from operations in fiscal 2000, however depleted
zinc sales will cease to be a significant contributor to our revenues in
subsequent fiscal years.
RADIOISOTOPES. With the acquisition of Chemotrade GmbH in Germany, we have
expanded our product offerings to include radioisotopes produced at several
facilities in Russia and Uzbekistan. Radioisotopes are radioactive. These
products are sold to us under territory-specific, exclusive distribution
agreements with the licensed representatives of the production facilities.
Extensive export controls effectively restrict the flow of these products to
well-defined channels, limiting the price competition more commonly observed
with some stable isotope products from countries that once were part of the
former Soviet Union. Sales of these products represented 34% of net revenues in
fiscal 1999.
Radioisotopes are used in fields as diverse as basic physics, biomedical
research, medical imaging and therapy, radioactive waste management technology
development, and inspection/verification technologies. Several of these market
segments are already experiencing strong growth, and with additional
radioisotope-based products in various stages of development and regulatory
approval, promise significant potential for further growth. Examples of existing
and emerging applications follow.
BIOMEDICAL RESEARCH. Traditionally, numerous aspects of the many phases of
drug development have been carried out using radioisotope-labeled versions of
promising compounds. Metabolism, distribution, mode of action and elimination of
candidate drug compounds can be studied with the radioisotopes of hydrogen,
carbon, and phosphorus, among others. We have been supplying several precursor
compounds labeled with carbon-14 to a major manufacturer who incorporates them
into more complex radioisotope labeled compounds for use in basic research and
pharmaceutical development. The precursors are produced under contract with a
company in which we hold a small minority share. While rational drug design and
stable isotope labeled compounds represent competition for this more traditional
approach to research and drug development, we believe a combination of
increasing drug development activity and the large body of data and experience
will ensure a strong market for these products.
MEDICAL IMAGING AND THERAPY. Radioisotopes have been used for years in the
diagnosis and treatment of many medical conditions in humans. The trend in these
two areas has been towards increasingly more specific chemicals which, after
labeling with the radioisotope and introduced into the patient, quickly
concentrate at the site of interest. In theory, the appropriate choice of
chemical and radioisotope labels would allow disease detection and determination
of extent, followed by therapy selection, administration and monitoring. Several
classes of chemical compounds ranging from monoclonal antibodies to peptides,
most recently, are being developed, tested and approved for use in the
detection, and eventually, the treatment of many disease states. While certain
isotopes will remain the dominant radioisotopes for imaging and therapy
monitoring, they typically have no role in therapy. We believe that with the
increased supply of new radioisotopes and the ongoing development of highly
specific biochemical therapies, this market segment represents a major growth
opportunity.
BRACHYTHERAPY. Cancer therapy continues to evolve to more effectively
target the many different types of cancer. The radioisotope labeled compounds
mentioned above promise great advances in focused treatment, but are still well
in the future. Today, external beam radiotherapy and chemotherapy are the
predominant technologies used in cancer treatment, but another technology,
brachytherapy, is emerging in the treatment of specific disease states like
prostate cancer. In this technique, small sealed sources are inserted directly
into the tumor using a variety of minimally invasive surgical methods. The
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radioisotope is chosen to ensure that only the tissue immediately adjacent to
the implanted seed is irradiated; this avoids irradiating nearby healthy tissue
as occurs with external beam radiotherapy. Several companies (Theragenics, North
American Scientific, International Isotopes, etc.) already offer or have
announced plans to offer brachytherapy products for the treatment of certain
forms of prostate cancer. Studies continue in the application of this technique
for other tumor types, including some breast cancers. We currently supply
several companies with radioisotopes for this application. We believe this
market segment represents one of the largest growth opportunities for
radioisotopes.
Another form of brachytherapy involves the temporary introduction of a
sealed and shielded source of radioisotope into the body to deliver a localized,
high dose irradiation of tissue. One of the applications being evaluated is for
irradiation of vessel walls immediately following balloon angioplasty to reduce
the occurrence of restenosis. We believe this application and others like it
will take several years to develop, but they represent interesting and promising
new opportunities for radioisotopes.
INDUSTRIAL APPLICATIONS. Numerous industrial applications require
radioactive materials. One of the largest uses is in radioactive source
standards. These are employed as calibration tools for numerous radiation
detectors, with one of the largest group of users being the Nuclear Medicine
departments in the thousands of hospitals throughout the world. We supply many
isotopes used in the manufacture of these sources and distribute the finished
products of one of these manufacturers in parts of Europe. The continued growth
in the numbers and complexity of nuclear medicine imaging equipment, especially
PET (positron emission tomography), should ensure growth in the demand for these
radioisotopes.
STABLE ISOTOPE LABELED COMPOUNDS. Stable isotope labeled compounds (known
as "SILCs") are created by incorporating carbon, nitrogen, hydrogen, and oxygen
isotopes into several thousand relevant chemical compounds. Sales of SILCs
represented approximately 15% and 16% of our net revenues in fiscal 1999 and
1998 and, because of the sale of our depleted zinc business, we expect this
percentage to increase in and after fiscal 2000. SILCs allow researchers to
probe the metabolism of living systems, determine the structures of important
biological compounds, design new drugs and measure extremely low levels of
environmental toxins. We believe that greater availability of stable isotopes
and advances in instrumentation (improvements in sensitivity and reduced cost)
will promote increased demand for SILCs. We have expanded our ability to acquire
some of these isotopes as a result of the Supply Agreement we entered into with
Eagle-Picher. If Eagle-Picher is able to produce enriched carbon isotopes from
its facilities in Oklahoma, we will have expanded our supply of these isotopes
and we will no longer be solely dependent on facilities in the former Soviet
Union as suppliers of these isotopes. Examples of existing and emerging
applications include:
METABOLIC STUDIES. Increasingly, drug studies are performed with labeled
drugs to facilitate research on metabolism, distribution, mode of action, and
elimination. The FDA may eventually mandate the labeling of all new drugs for
investigational use during some or all phases of pre-clinical and clinical
evaluations of these drugs, but there can be no assurance that the FDA will make
this mandate in the near future, if at all.
RATIONAL DRUG DESIGN. Nuclear magnetic resonance ("NMR") spectroscopy is
being developed as a tool to determine the structure of larger and larger
molecules in solution, many of which cannot be analyzed by the more traditional
x-ray crystallography techniques. We believe that this new NMR sensitivity,
combined with the sophisticated isotopically labeled cell growth media needed to
produce the labeled human proteins, will require an increasing supply of the
stable isotopes of carbon, nitrogen, and deuterium.
PRODUCT TAGGING AND STEWARDSHIP APPLICATIONS. The source of materials and
explosives may be identified, without changing their chemistry, by tagging with
the stable isotopes of carbon, nitrogen, oxygen, and hydrogen. Several other
approaches are currently being implemented, and other
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technologies have also been proposed. These other approaches involve the
addition of extraneous materials such as dyes, exotic chemical compounds or
radioactive compounds. We believe that adding such extraneous materials can
sometimes detract from the performance of the product. Tagging with small
amounts of isotopically engineered versions of the material itself results in a
unique identifier that behaves chemically in exactly the same way as the host
material.
Our efforts to date in the production and sales of SILCs have focused on
structurally simple "building block" compounds which are used by our customers
to synthesize more complex and higher value SILCs. We market carbon-13 and
nitrogen-15 building block SILCs, which we obtain through our supply alliance
with several stable isotope producers. In the near term, we will continue this
strategy of supplying "building block" forms of stable isotopes while at the
same time increasing our production capacity both at our alliance producers and
our facilities.
In addition to providing additional revenue potential and possibly higher
margins, we believe that developing or acquiring complex SILC synthesis
capability would be synergistic with our efforts to develop the breath test
diagnostics product area, and would also aid in early identification of future
stable isotope business opportunities.
DIAGNOSTIC BREATH TESTS. Healthcare consumes a large amount of resources in
the United States and worldwide. We believe that substantial changes are taking
place to control or reduce the high cost of healthcare. A significant trend is a
general shift from therapy to cost-effective prevention. Early diagnosis of
conditions which otherwise could require expensive therapies could help diminish
the risks and expense of such subsequent procedures. We have elected to pursue
what we believe is a promising segment of this market: diagnostic breath tests
("DBTs").
Breath tests are all based on the same principle and use a common instrument
to measure the result:
- a small amount of a carbon-13 SILC (referred to as a substrate) is
swallowed by the patient;
- breath samples are collected at regular intervals; and
- breath samples are analyzed for their carbon-13 content.
Most DBTs are intended to replace unpleasant, costly and sometimes risky
procedures such as endoscopies and biopsies of the digestive system. We believe
that DBTs may become a widely used and accepted diagnostic tool. Certain DBTs
are currently being sold in the U.S. and in Europe. Their ease of administration
may allow medical internists and general practitioners to use them, potentially
resulting in lower cost, earlier diagnosis, and broader application.
The market for DBTs is defined by the incidence of diseases addressed, and
existing, alternative diagnostic procedures. The urea breath test is the most
established DBT. As they become more widely available, carbon-13 urea breath
tests ("UBTs") may address a potential population of approximately 8,000,000
peptic ulcer patients in the U.S., who presently utilize drugs and procedures
with an estimated cost of at least $2 billion each year. We believe that the
UBT, coupled with antibiotic treatment, can reduce the cost of peptic ulcer
management. Two companies in the U.S. have received FDA approval for a carbon-13
UBT. We believe that several companies in Europe have received regulatory
approval.
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The following table identifies additional breath tests, which are at various
stages of clinical research and pre-clinical and clinical trials by various
third parties.
<TABLE>
<CAPTION>
BREATH TEST CONDITION DIAGNOSED
- ----------- ----------------------------------------------------------------------
<S> <C>
(13)C-Urea................ Helicobacter pylori
(13)C-Triolein............ Fat malabsorption
(13)C-Spirulina........... Gastric emptying
(13)C-Galactose........... Liver function
(13)C-Xylose.............. Small Bowel Bacterial Overgrowth (the major cause of chronic diarrhea)
(13)C-Aminopyrine......... Liver function
(13)C-Caffeine............ Liver function
(13)C-Erythromycin........ Cyclosporin dosage following transplantation
(13)C-Valine.............. Genotype of MSUD (Maple Syrup Urine Disease)
(13)C-Sucrose............. Sucrose malabsorption (sucrase-isomaltase complex deficiency)
(13)C-Starch.............. Pancreas amylase function
(13)C-Cholesteryl
Octanoate.............. Pancreas esterase function
</TABLE>
We have entered this market supplying carbon-13 to manufacturers. We are
considering the possibility of manufacturing pharmaceutical-grade substrates
sometime in the future. We purchase carbon-13 from the Institute of Stable
Isotopes located in Tblisi, Georgia. This institute was the center of
development of technology for light isotope separation in the former Soviet
Union.
We are investigating the feasibility of building such plants and are
considering various strategic options, such as partnering or acquisition of
complementary technologies or businesses, to leverage our carbon-13 production
capability. One such effort is the Supply Agreement we negotiated with Eagle-
Picher for the supply of various isotopes including carbon-13 as described
above.
The DBT business is subject to extensive government regulation. The products
and instruments used, which may be regulated as drugs and devices, are subject
to the scrutiny of FDA review and approval as well as ongoing FDA inspection of
most aspects of the production, marketing, distribution and use of these tests.
We believe that the production and marketing of DBTs are also subject to similar
regulatory controls in the foreign countries where we would likely seek to
market products. Consequently, such products cannot be commercially introduced
for several years, and there can be no assurance that the products would ever be
approved for use.
MEDICAL IMAGING AND THERAPY MATERIALS. Stable isotopes of thallium, zinc,
cadmium, xenon, oxygen, strontium, and many others are routinely used in a
variety of medical imaging and therapy applications. In their enriched form or
converted to a specific radioactive isotope in a cyclotron or nuclear reactor,
these materials are incorporated in chemical compounds which concentrate in
specific parts of the human body upon injection, inhalation, or ingestion.
Measuring the distribution of the materials in the patient can assist physicians
in diagnosing disease states and developing appropriate treatment therapies,
some of which incorporate radioactive materials produced from stable isotopes.
We have decided to pursue one particular target isotope, oxygen-18, used to
produce fluorine-18, which is incorporated into the pseudo-sugar, FDG, and used
in Nuclear Medicine to diagnose multiple metabolic abnormalities. Approvals by
the FDA, favorable reimbursement levels by Medicare/Medicaid and third party
insurers, combined with similar dynamics in Europe and Asia are expected to
result in significant growth in FDG studies, which should translate into
increased oxygen-18 demand. Buyers of oxygen-18 range from the single site users
who purchase in gram quantities, to the radiopharmacy companies who will buy in
kilogram quantities.
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To meet this demand, we announced in May 1999 a multi-year joint cooperation
agreement with Global Scientific Technologies in Russia, which is the third
largest producer of oxygen-18 in the world. With market demand exceeding supply
and increasing market prices, this agreement encompasses current production,
increased production through recycling, new production facilities in the United
States and elsewhere, and new value-added forms of the isotope. The agreement
has resulted in a shift in our sales and marketing strategy from smaller buyers
to larger commercial providers of irradiation equipment, flourine-18, and FDG,
who will likely dominate the market and whom we anticipate will favor long-term
supply partnerships.
We will initially focus our sales efforts on the smaller buyer until assured
supplies permit us to aggressively pursue long-term supply agreements with the
large radiopharmacy companies, like PetNet, Syncor, and Nycomed-Amersham, who we
believe will dominate this market through their networks of regional
radiopharmacies. To supply this anticipated demand, we are exploring a
combination of options that include exclusive distribution rights for existing
production, investment in expansion of existing production facilities, and
investment in our own production facilities.
Most phases of the development and ongoing production of these materials are
controlled by the FDA and similar foreign regulatory agencies. This fact,
combined with the complexities of production and distribution, has resulted in a
market with only a few manufacturers. Tight quality control requirements, and
the importance to the health-care industry of a ready supply of these drugs,
leads these manufacturers to pay close attention to their stable isotope
suppliers. Quality, supply reliability, ultimate source, breadth of offerings,
price and track record are principal factors that a manufacturer considers in
evaluating a potential stable isotope supplier. Much of the material used to
manufacture such products originates in countries of the former Soviet Union.
While the U.S. Department of Energy ("DOE") has facilities that can manufacture
stable isotopes, its costs are usually substantially higher because of the full
cost recovery mandated by legislation governing the DOE's operations.
We believe that we are capable of supplying many of the stable isotopes
currently sold in this market. Since the original impetus for new applications
of stable isotopes in health care frequently comes from the drug manufacturers,
we have recently begun marketing our products, services and capabilities to the
existing and emerging manufacturers.
ISOTOPICALLY PURE SEMICONDUCTORS. Isotopic purification of carbon used to
manufacture synthetic diamonds has resulted in substantially improved physical
properties. Published tests conducted by General Electric Corporation and others
have shown that the removal of a small amount of carbon-13 to produce
isotopically pure carbon-12 synthetic diamonds can result in a 50% improvement
in thermal conductivity of the diamond at room temperature. Additionally the new
diamond was found to be highly transparent, and the transmission of certain
frequencies of laser light was increased by approximately ten times without the
diamond sustaining damage. General Electric Corporation has stated that
isotopically pure carbon-12 diamonds may enable faster, more reliable computers
due to their superior heat removal capability and may result in more efficient
cutting tools and more accurate laser measurement devices, and that the new
diamonds may enable designers to use lasers in semiconductor fabrication
techniques.
Studies conducted at Lawrence Berkeley Laboratory and the Max Planck
Institute on isotopically pure germanium have shown thermal conductivity
improvements similar to those found in isotopically pure carbon-12 diamonds. The
thermal conductivity of a thin film of isotopically pure silicon-28 was
demonstrated by a researcher at Brown University in 1997. The thermal
conductivity was found to be 60% higher than natural silicon at room temperature
and 40% higher at 100 degrees Centigrade. We believe that this level of thermal
conductivity improvement should significantly benefit the semiconductor
industry, and therefore we have decided to concentrate our development efforts
on silicon-28 for the near term future.
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According to the Semiconductor Industry Association, the 1998 market for
silicon wafers and other semiconductor substrates was approximately $7 billion.
Improvement in the thermal conductivity of silicon is important since as the
feature size of semiconductor devices continuously decreases, the power density
increases. As power density increases, more heat is generated per unit volume
causing the device-operating temperature to rise. The semiconductor industry is
moving toward lower operating voltages and is using mechanical means to remove
bulk heat, but we believe that greater heat dissipation on the micro scale will
become even more important to the industry in the future. Better thermal
conductivity directly affects heat removal capability, and indirectly improves
device speed. As the industry moves toward deep sub-micron devices, the ability
to remove heat will be a prime consideration for the semiconductor industry.
We believe that if commercial opportunities emerge, isotopically pure
silicon-28, deployed as wafers or substrates and as silane or trichlorosilane
gas for building epitaxial layers should find a niche in the manufacture of
high-performance silicon semiconductors. Even at a premium price, we believe
that silicon-28 can compete in high-performance, less cost-driven markets. We
have produced isotopically pure silicon-28 silane gas, and we have produced
silicon-28 epitaxial layers on natural silicon substrates.
We believe that these materials meet industry standards for semiconductor
fabrication and have met the quality standards for microprocessor fabrication.
We have provided specimens to academic institutions and industrial semiconductor
manufacturers. These institutions have agreed to measure certain physical and
electrical properties of silicon-28, manufacture devices, and compare the
performance to devices made with natural silicon. Epitaxial wafers with layers
of silicon-28 made to custom specifications are currently for sale in
pilot-scale quantities. It is our goal to provide silicon-28 epitaxial wafers to
a wide variety of semiconductor manufacturers, but the best near term
opportunity appears to be microprocessors and certain power semiconductors. To
this end, we delivered wafers to Advanced Micro Devices in the fourth quarter of
fiscal 1999.
During fiscal 1999, we acquired an exclusive license to two U.S. patents
owned by Yale University, concerning isotopically pure semiconductor devices.
These patents expire in 2009 and 2012 and cover silicon, germanium, gallium
arsenide and most isotopically pure compound semiconductors. We believe that if
evaluations demonstrate the commercial feasibility of one or more products,
demand could emerge in certain segments of the semiconductor market. There can
be no assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products, that we will be able to commercialize any such
products or that a market will emerge for any such products.
During fiscal 1999, we signed a joint research and development agreement
with Silex Systems Ltd. The agreement calls for Silex to partially fund some of
our development activities and for Silex to assess the feasibility of building a
silicon isotope separation plant using Silex's patented laser isotope separation
process. These agreements represent the launch of our efforts to ensure a large
supply of silicon isotopes at a reasonable cost to support the large-scale
manufacture of isotopically pure silicon wafers. In December 1999, we entered
into a Supply Agreement with Eagle-Picher Technologies, LLC for the supply of
isotopically pure silicon-28 from its Oklahoma-based facility. This Supply
Agreement superceded a prior agreement, signed in fiscal 1999, with Eagle-Picher
to cooperate on developing silicon-28 production capabilities at the Oklahoma
facility. As of April 30, 2000, no silicon-28 has been delivered by
Eagle-Picher. Eagle-Picher expects to commence deliveries in the second half of
calendar year 2000.
RESEARCH AND DEVELOPMENT
Consistent with our product development strategy, we are seeking to identify
and evaluate a variety of new stable isotope products and potential markets for
economic and technical feasibility. We will continue to fund research and
development to improve technologies for isotope separation and
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materials processing technologies. During fiscal 1999 and 1998, research and
development expenses were $1,155,000 and $811,000, respectively. Research and
development expenditures during the nine months ending January 31, 2000 were
approximately $919,000.
We have focused our efforts on developing lower-cost carbon-13 separation
methods and the production of high chemical-purity silicon-28 silane gas and
epitaxial wafers made from that silane gas. To date this work has been performed
for us on a sub-contract basis by unaffiliated contractors. We attempt to
retain, to the maximum extent possible, ownership of any intellectual property
resulting from such work.
We have been seeking to enter into formal joint development agreements with
a number of semiconductor industry participants in the areas of silicon wafer
manufacture and various potential applications for isotopically engineered
silicon. During fiscal 1999, we signed an agreement with Voltaix, Inc. to be the
distributor of our products for the ion implantation industry. The first product
being sold in accordance with the Voltaix agreement is silicon tetrafluoride
enriched in the silicon-29 isotope. The isotopically enriched materials allow
higher beam currents and higher productivity than the natural silicon
tetrafluoride currently used in the industry.
PATENTS AND PROPRIETARY RIGHTS
We rely primarily on a combination of trade secrets, confidentiality
procedures and contractual provisions to protect our technology. Despite our
efforts to protect our rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our technology and products is difficult. In
addition, the laws of many countries do not protect our rights in information,
materials and intellectual property that we regard as proprietary to as great an
extent as do the laws of the United States. There can be no assurance that our
means of protecting our rights in proprietary information, materials and
technology will be adequate or that our competitors will not independently
develop similar information, technology, or intellectual property.
We currently have no patents in our own name and have not filed any patent
applications. We have rights to several isotopically engineered innovations
regarding electronic and optical materials which we believe may be patentable.
Ongoing work in the area of isotope separation by chemical means may also lead
to patentable inventions.
In April 1999, we announced that we had entered into an exclusive licensing
agreement with Yale University that entitles us to exclusive intellectual
property right to patents covering semiconductor devices derived for
isotopically engineered materials. The license requires payment by us of a
royalty based on a percentage of our, or our sublicensees', net sales of
products derived from technology covered by the Yale patents (#5,144,409, dated
September 1, 1992, and #5,442,191, dated August 15, 1995).
SIGNIFICANT CUSTOMERS
Four separate customers accounted for 10% or more of net revenues in fiscal
1998: 47%, 18%, 12% and 11%. Two separate customers accounted for 10% or more of
net revenues in fiscal 1999: 23% and 13%. At January 31, 2000, one customer
accounted for approximately 18% of net revenues during the nine months ended
January 31, 2000. The same customer accounted for approximately 17% of net
revenues during the nine months ended January 31, 1999.
COMPETITION
The markets for our products and proposed products are highly competitive,
and we expect that competition will continue and increase as markets grow and
new opportunities are realized. Some of
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<PAGE>
our current competitors, and many of our potential competitors, are larger and
have significantly greater financial, technical, marketing and other resources.
Some of our competitors may form partnerships or alliances with large
pharmaceutical or electronics companies, with the resulting entity possessing
more market strength than we have. Our competition varies greatly depending on
which product or industry is considered.
DEPLETED ZINC. During fiscal 1999, we were among the leading producers of
depleted zinc. We also believed that other entities or persons were expected to
begin producing depleted zinc in substantial quantities in the near future.
Several such possible producers have adequate technical and financial resources
to become viable competitors in the near future. In particular, Siemens has
indicated that it has a relationship with Ultracentrifuge Netherlands ("UCN")
and GE has indicated that it may establish a second Russian supply source. UCN
also competes with us in the markets for medical target isotopes. This
competitive environment, along with many other factors, contributed to our
decision to sell our depleted zinc business to Eagle-Picher Technologies, LLC in
December 1999.
SILCS AND DBT MATERIALS. We have several larger and numerous smaller
competitors in the markets for the SILC products, and we will have additional
competitors if we offer breath test diagnostic products and additional SILCs in
the future. Two of these companies, Cambridge Isotope Laboratories Inc., and
Isotec, Inc., have their own isotope separation capability, while all of our
competitors produce some combination of SILCs and DBT substrates. Two recently
merged companies in the U.S. have received FDA approval for a carbon-13 UBT.
Several companies in Europe have also received regulatory approval. Our
principal current competitors and potential competitors also include MassTrace,
euriso-top, Aldrich Chemicals, Icon Services, Omicron, C/D/N Isotopes and Martek
Biosciences. We have in the past, and may in the future, sell products to or
purchase products from these companies.
SEMICONDUCTOR MATERIALS. Due to the early stage of the semiconductor
materials opportunities, we have not identified material competitors in these
markets. However, given the potential size and importance of these new potential
markets, we anticipate that substantial competition will emerge if these markets
develop.
Many of the areas in which we are or intend to compete are rapidly evolving.
There can be no assurance that an existing or potential competitor has already
developed, or may develop, a patentable product or process, which will
substantially prevent us from competing in our intended markets.
We compete primarily on the basis of product performance, proprietary
position and price. Some of our products may also compete based on product
efficacy, safety, patient convenience and reliability. In many cases the first
company to introduce a product to the market will obtain at least a temporary
competitive advantage over subsequent market entrants.
MANUFACTURING AND SUPPLY
Consistent with our strategy to minimize capital expenditures, we obtain
isotopes through multi-year supply agreements. To a lesser extent, from time to
time, we also obtain stable isotopes from a variety of other Russian isotope
sources and may invest in our own isotope production facilities in the future
upon determining the optimum production technology. Currently, we obtain
substantially all of our isotopes from Russia, the Republic of Georgia, and
other locations within the former Soviet Union. In December 1999, we entered
into a Supply Agreement with Eagle-Picher Technologies, LLC, for the right to
purchase enriched silicon and carbon isotopes from its facilities in Oklahoma.
In addition, Eagle-Picher has an obligation to provide us 200 kilograms of
isotopically pure silicon-28 during calendar year 2000. The first deliveries
from the Eagle-Picher silicon facility are scheduled to begin in April 2000.
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<PAGE>
We entered into a Supply Agreement dated July 1996 with Techsnabexport and
an isotope enrichment plant located in Russia, which is owned by the Ministry of
Atomic Energy of the Russian Federation, which is part of the cabinet of the
government of the Russian Federation. Under the Supply Agreement, the plant
produced depleted zinc and other stable isotopes for us. We assigned this supply
agreement to Eagle-Picher in December 1999.
We are still receiving other stable isotopes from plants located in Russia.
The enforceability of the agreement might be subject to the greater degree of
uncertainty than if the agreement was with a U.S. company and if disputes were
resolved in the U.S. The supply of stable isotopes could be directly affected by
political, economic and military conditions in Russia. Accordingly, our
operations could be materially adversely affected if hostilities involving
Russia should occur, if trade between Russia and the United States were
interrupted or curtailed, or if we should fail to obtain and maintain all
necessary governmental approvals. We have assigned this supply agreement to
Eagle-Picher and we no longer have any rights under it.
Operations in Russia entail certain other risks, including, among others,
supply disruptions as well as introduction of tariffs and fluctuations in
freight rates. See "RISK FACTORS," above. There can be no assurance that our
relationship with our processor in Russia will be successfully maintained.
Disruption or termination of our supply sources could delay shipments by us and
could have a material adverse effect on our business, financial condition and
results of operations. We do not presently maintain political risk insurance but
we will evaluate the desirability and availability of such insurance in the
future.
The plant with which we have the agreement described above is one of four
similar plants which were designed to address the former Soviet Union's and
certain other countries' needs for low enriched uranium for commercial nuclear
power plant fuel and for highly enriched uranium for military purposes.
Following the nuclear accident at Chernobyl, certain of the Russian nuclear
power plants have been shut down, reducing demand on these enrichment plants. In
addition, in recent years the demand on these plants to produce products for
military purposes has declined. In part in response to these trends, the plant
has converted a portion of its capacity to processing stable isotopes, and we
believe that additional capacity could be converted if the plant decided to do
so. We believe that the plant has the potential capacity to meet all of our
foreseeable needs for the processing of stable isotopes. We believe that one or
more of the other similar enrichment plants may convert part of its capacity to
the production of stable isotopes should market demand grow substantially.
Certain other facilities elsewhere in the world, including the Oak Ridge
National Laboratory in Oak Ridge, Tennessee (which relies on government funding
for continuing production), and certain private and pseudo-governmental
organizations in Great Britain, Germany, The Netherlands and South Africa, have
the potential to produce stable isotopes and, in certain cases, actually produce
isotopes.
Recognizing the need to have more control over the production of Isonics'
isotopes, we announced plans for a joint venture with the Institute of Stable
Isotopes in the Republic of Georgia, the pre-eminent center for the separation
of light isotopes in the countries that comprised the former Soviet Union. This
agreement calls for investment by both parties to increase carbon-13 production
at the Institute and provides for exclusive sales of all carbon-13 production to
Isonics. This agreement also grants rights to us to employ the Institute's
separation technology at new production facilities anywhere in the world. The
two parties have also agreed to cooperate on development projects, which would
include new isotope production technologies, as well as, new applications of
isotope products.
To increase capacity and to geographically diversify our production of
certain isotopes, on December 1, 1999, we entered into a Supply Agreement with
Eagle-Picher Technologies, LLC, for it to supply us with enriched isotopes of
silicon and carbon. We have already purchased 200 kilograms from Eagle-Picher to
be delivered during 2000. Eagle-Picher expects to produce these isotopes from
its facilities in Oklahoma, a portion of which are currently under construction.
There can be no guarantee,
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however, that the facility will be able to produce high-purity isotopes on
commercially reasonable terms. We believe that this relationship with
Eagle-Picher may improve our profitability and will improve the security of our
supply if the facility performs as expected.
We have historically depended upon a single processor, located in Russia,
for one process involved in the manufacturing of our products, and upon a single
supplier or a limited number of suppliers and processors for certain other
manufacturing processes. Although we do have written agreements with certain of
our suppliers and processors, we do not have any written agreements with other
suppliers and processors. We seek to reduce our dependence on our sole and
limited suppliers, but disruption or termination of any of the sources could
occur, and such disruptions could have at least a temporary material adverse
affect on our business, financial condition and results of operations. Moreover,
a prolonged inability to obtain alternative sources for processing could
materially adversely affect our relations with our customers. Although the
relationship with Eagle-Picher should provide greater security for our supply of
silicon and carbon isotopes, if the facility performs as expected, there can be
no assurance that it will in fact do so.
GOVERNMENT REGULATION
Regulation by government authorities in the United States and other
countries is a significant consideration in the development, production,
distribution and marketing of our products and in our continuing research,
development, and other activities. In order to clinically test, manufacture,
distribute, market, and sell products, especially those intended for therapeutic
or diagnostic use, mandatory procedures and safety and other standards
established by applicable regulatory authorities must be followed. In many
cases, specific approval to clinically test and commercially distribute such
products must be obtained from numerous governmental authorities. Furthermore,
we are subject to various laws, regulations and requirements relating to such
matters as the import and export of our products, ensuring safe working
conditions, laboratory and manufacturing practices, the use and disposal of
hazardous or potentially hazardous substances used in connection with our
research, development and manufacturing activities. Some of the regulations are
summarized below.
FDA REGULATION. We are not currently subject to any FDA regulation because
we do not currently manufacture any DBTs, drug products, or other medical
devices. Our customers may, in many cases, be subject to FDA regulation. If we,
in the future, test, manufacture, market, distribute, export, or sell diagnostic
products (such as any DBTs) or medical devices, we will also likely be subject
to extensive and rigorous regulation by the United States and other countries in
which we may choose to test, manufacture or market our proposed diagnostic
products. We have not determined those countries, other than the United States,
where we might seek regulatory approvals to market any such products it may
develop. The products we intend to develop are subject to rigorous preclinical
and clinical testing and other FDA approval requirements, and similar
requirements in most other countries.
EXPORT AND ENVIRONMENTAL CONTROLS. Certain of our products and technology,
particularly those having potential nuclear energy or military applications,
such as depleted zinc and related technology, are subject to stringent controls
over their manufacture, use, distribution, dissemination and export. In many
cases, such activities may require approvals or licenses from various U.S. and
foreign governmental agencies, and compliance with substantial regulatory
controls. Such approvals can be difficult to obtain and maintain and may not be
obtainable from certain countries. Furthermore, such approvals or licenses may
be restricted or terminated because of changes in laws, regulations, policies
governing those approvals and licenses, or changes in the political or other
matters in the countries granting such approvals or licenses to which our
products and technology would be exported.
Likewise, certain of our current and potential operations may necessitate
submitting registrations or notifications to federal and state regulatory
authorities responsible for environmental and related matters, including the
U.S. Environmental Protection Agency ("EPA"). Additionally, we are required to
40
<PAGE>
comply with stringent controls pertaining to the handling and distribution of
our products and operations, including under certain conditions obtaining
governmental approvals and licenses, either of which may be subject to
significant restrictions. Violation of any of these regulatory controls may
subject us to significant administrative civil and criminal penalties, including
loss of our approvals and licenses, or the imposition of additional restrictions
on our operations. There can be no assurances that we will be able to obtain and
maintain the approvals or licenses necessary to successfully market our products
and technology, or that it will be able to comply with applicable laws and
regulations. Any such failure to obtain such licenses or approvals, where
required, and comply with such laws and regulations may materially and adversely
affect our business, financial condition and results of operations.
REGULATION OF NON-MEDICAL CHEMICAL PRODUCTS. The import, export, handling,
transportation, sale, storage and other activities undertaken in connection with
our non-medical products are subject, or potentially subject, to substantial
federal, state, local and foreign government controls pertaining to hazardous
chemicals and chemical wastes, import export controls and other matters. These
regulations are complex, pervasive and constantly evolving. Our ability to
effect and maintain compliance with these controls is important to our
commercial success.
With respect to transportation of our products, we rely predominantly on
Russian and U.S. freight carriers to handle and deliver all our shipments, and
utilize domestic overnight courier services for shipments to our customers.
These carriers must comply with Department of Transportation ("DOT") regulations
in the shipping and packaging of the stable isotope chemicals. We must also
comply with DOT regulations when packaging material kept in inventory for
domestic shipment. As required under federal and state law, we have prepared
Material Safety Data Sheets ("MSDS"), which are enclosed with each product
shipment. We must periodically update our MSDS sheets based on new literature
reports. We cannot assure that our MSDS sheets will continue to be in compliance
with applicable requirements.
The shipments received at our Columbia, Maryland facility are subject to
Federal and Maryland regulations pertaining to hazardous chemicals and hazardous
waste disposal. These shipments are stored in an area of the facility designated
for such materials. Currently, we are considered a small quantity generator of
hazardous waste and will rely on certified haulers to dispose of our minimal
amounts of hazardous waste. We believe we are in compliance, in all material
respects, with applicable federal and state environmental regulatory
requirements.
Should the levels of hazardous waste increase as our inventory and handling
operations increase in volume, we would then have to comply with Environmental
Protection Agency ("EPA") requirements and obtain an EPA ID number, which is
costly and requires an increased investment of personnel and money. We have no
experience in this area of compliance and we would have to rely on outside
consultants or hire additional employees with pertinent experience and training.
Potentially, if substantially larger inventories of hazardous chemicals must be
maintained at the Maryland facility, we might have to move to new facilities in
order to meet EPA requirements for the storage of hazardous chemicals.
The shipments from Russian manufacturing sources now enter the U.S. duty
free (without tariff); however, there can be no assurance that such duty-free
importation will continue. If the shipments become subject to tariff, we cannot
assure that we will be able to sell the imported products or that the products
will be commercially viable because of these increased tariff costs.
The Nuclear Regulatory Commission ("NRC") has authority to regulate the
importation and exportation of deuterium containing chemicals whose ratio of
deuterium atoms to hydrogen atoms exceed 1:5,000. At present, the deuterium
containing compounds that we import do not require any special licenses or
importation authorization. There can be no assurances that the NRC will continue
these policies. The NRC regulates exports of deuterium containing chemicals
under general license. We
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<PAGE>
will not be able to ship these chemicals to certain countries that require a
special license for such shipments; none of these countries represent
significant current or expected future markets for our anticipated and present
products. In addition, certain technology or products that we have or may in the
future develop, may be subject to other government controls pertaining to
armaments, including the need to obtain special licenses for exports. The
imposition of such controls may impair our ability to broadly market such
products.
PRODUCT LIABILITY AND INSURANCE
Our business exposes us to potentially substantial product, environmental,
occupational and other liability risks which are inherent in product research
and development, manufacturing, marketing distribution and use of our products
and operations, including, but not limited to, products used in nuclear power
plants and medical device products. We have product liability insurance in order
to protect ourselves from such potential exposures. There can be no assurance
that adequate insurance coverage will be available at an acceptable cost, if at
all, or a product liability or other claim would not materially and adversely
affect our business or financial condition.
The terms of our agreements with our customers provide that liability to
nuclear power plant utilities is limited to our standard warranty to replace
non-conforming product, and liability for consequential damages caused by the
improper use of our products is limited by contractual terms. Nevertheless, one
or more third parties could bring an action against us based on product
liability, breach of warranty or other claims, and, there can be no assurance
that the foregoing contract clauses would effectively limit our liability in any
such actions. We are no longer supply depleted zinc to nuclear power plants.
EMPLOYEES
As of April 30, 2000, we had 31 full and part-time employees, of whom eight
have Ph.D.s and one other has an advanced degree in engineering. Approximately
seven employees are involved in research and product development, ten in
manufacturing and sourcing, and fourteen in business development and
administration, but such employees' responsibilities may also encompass areas
other than their primary area of responsibility. We consider our relations with
our employees to be good. None of our employees are covered by a collective
bargaining agreement.
PROPERTIES
We relocated our headquarters to Golden, Colorado in December 1998, and now
share facilities with our wholly-owned subsidiary, Interpro. Interpro leases
approximately 41,000 square feet of office, research and production facilities.
The lease expires in July 2000. The facility is used for contract research and
development and materials processing as well as administration. By combining our
headquarters into the facility of our subsidiary, we have significantly reduced
our costs for both space and administrative support. We also lease 650 square
feet for an administrative office in Columbia, Maryland that expires
November 30, 2001. Chemotrade leases office space in Dusseldorf and Leipzig,
Germany.
LEGAL PROCEEDINGS
We are not subject to any pending or, to our knowledge, threatened, legal
proceedings.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth the names and ages of all the Directors and
Executive Officers of Isonics, and the positions held by each such person. The
directors each serve until their successors are duly elected and qualified;
officers are appointed by, and serve at the pleasure of, the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ---------------------------------------------------
<S> <C> <C>
James E. Alexander........................ 51 President, Chief Executive Officer and Chairman of
the Board
Boris Rubizhevsky......................... 49 Senior Vice President, Vice Chairman and Director
Daniel J. Grady........................... 45 Vice President, Medical, Research and Diagnostics
Stephen J. Burden......................... 51 Vice President, Semiconductor Materials
Brantley J. Halstead...................... 42 Chief Financial Officer, Vice President, Finance
Robert Cuttriss........................... 51 President of Interpro
Herbert Hegener........................... 53 Managing Director of Chemotrade
Lindsay A. Gardner(1)(2).................. 49 Director
Richard Parker(1)(2)...................... 56 Director
Larry J. Wells(1)(2)...................... 57 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Each of the directors holds office until the next annual meeting of
shareholders and until his or her successor is elected and qualified or until
his or her earlier death, resignation, or removal. Each officer serves at the
discretion of the Board.
Mr. Alexander is our co-founder and has served as our President, Chief
Executive Officer and a director since our inception. He has worked full-time
for Isonics since January 1994. From June 1972 to December 1993, he worked in a
variety of technology positions at General Electric Corporation ("GE") in the
aircraft engine and nuclear power businesses, where his last position was
Manager of Technology Programs. Mr. Alexander received his Bachelors degree in
Metallurgical Engineering from the University of Cincinnati and performed
graduate work in materials science there. He earned a Masters degree in Business
Administration from Santa Clara University.
Mr. Rubizhevsky is also a co-founder of Isonics and has been a Senior Vice
President and a director since inception and became Vice Chairman in
March 1997. From November 1986 through December 1994, he owned and operated SAR
Marketing, a consulting firm providing business advice and services to large
multinational corporations. From June 1977 to May 1986, Mr. Rubizhevsky worked
at General Electric Corporation as Business Development Manager in various
international locations. He received his Bachelors degree in Engineering from
Stevens Institute of Technology.
Dr. Grady joined us as Vice President, Medical, Research and Diagnostics in
1995. From March 1994 through September 1995, Dr. Grady was Vice President of
Research and Development at Sopha Medical Systems, a medical diagnostic imaging
equipment manufacturer. From April 1991 until March 1994, he served as Marketing
Manager, Nuclear Energy for General Electric Corporation ("GE"). From May 1988
through March 1991, Dr. Grady served as Software Engineer Manager, Nuclear
Medicine for GE in England. From October 1984 through May 1988, he served as
Clinical
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Applications Manager for GE Nuclear Medicine. Between June 1981 and
October 1984, he served as Engineering Analysis Section Head for TRW. Dr. Grady
received his Bachelors and Masters degrees, and Ph.D. in Nuclear Engineering
from the University of Michigan.
Dr. Burden joined us in 1997. Prior to joining Isonics Dr. Burden was
Director of Product Development at sp3, Inc., a manufacturer of diamond-coated
tools. From 1984 to 1993, he was Manager of Advanced Materials R&D at GTE
Valenite, a subsidiary of GTE Corporation, a manufacturer of cutting tools. From
1974 to 1984, Dr. Burden was employed by General Electric Corporation in various
capacities. Dr. Burden has a Ph.D. and a Masters of Science degree, both in
Materials Science, and both from Drexel University. Dr. Burden has a Bachelors
degree in Science Engineering, and an MBA from the University of Michigan.
Mr. Halstead joined us as Chief Financial Officer in 1999 and was promoted
to Vice President, Finance effective January 30, 2000. Most recently,
Mr. Halstead was Chief Financial Officer of Bio-Medical Automation, Inc.
(formerly OZO Diversified Automation, Inc.), from 1997 through 1999.
Mr. Halstead also has nine years of management consulting experience, including
five years with Deloitte & Touche LLP. Prior to earning his Masters of Business
Administration in Finance from the University of Denver, Mr. Halstead worked as
a metallurgical engineer. Mr. Halstead received his Bachelors degree in
Metallurgical Engineering from the Colorado School of Mines, and his Masters of
Accountancy from the University of Denver.
Dr. Cuttriss has served as the President of Interpro since 1993. With
29 years experience in process operations in the mining and metallurgical
industries, Dr. Cuttriss' experience includes holding the title of principal
consultant and director of Metallurgy International, Inc., from 1983 through
1993. He has undertaken management and technical assignments covering the
design, commissioning and operation of mineral treatment plants, technical
audits and evaluations, pilot plant testing and process development for projects
throughout the world. Dr. Cuttriss received his Bachelors and Ph.D. degrees in
Metallurgy from the University of Melbourne and his Masters in Metallurgy from
the University of Queensland.
Mr. Hegener is a co-founder of Chemotrade and has served as the President
since its formation in 1991. From 1988 to 1991, Mr. Hegener was with Medgenix
Deutschland GmbH-Dusseldorf, and his last position with this firm was Managing
Director. From 1973 to 1988, Mr. Hegener worked at the Hempel Group, Dusseldorf,
Germany, in various management positions. Mr. Hegener is a specialist in stable
and radioactive isotopes. He has degrees in Chemistry and Economics.
Ms. Gardner was elected a director in September 1993. She has served from
1991 through the present as President of LG Associates, a US-based management
consulting firm providing materials management expertise to foreign company
affiliates of US companies in developing countries. During her tenure at LG
Associates Ms. Gardner resided in Moscow, Russia from September 1991 to
January 1994, when she moved to Beijing, China. From 1977 to 1991, Ms. Gardner
worked for General Electric Corporation in a variety of management and
functional positions including international marketing, quality assurance and
materials. Ms. Gardner received a Bachelors degree in International Economics
from The George Washington University Elliott School of International Affairs,
and earned a Masters of Business Administration from the University of
Louisville.
Mr. Parker has served as a director since August 1998. Mr. Parker is
presently Vice-President of Distribution Sales for Cypress Semiconductor and has
held that position since December 1997. Previously, Mr. Parker was Director of
Sales for Cypress from April 1984 to December 1997. Prior to joining Cypress, he
held various sales and marketing management positions at Fairchild Semiconductor
from 1973 to 1984. He received a Bachelors degree in Education from the
University of North Dakota.
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<PAGE>
Mr. Wells was elected a director of Isonics in January 2000. Since 1989,
Mr. Wells has been a general partner of SVP Management Company, the management
company for Sundance Venture Partners, L.P., a venture capital fund. From 1983
to 1989, Mr. Wells served as Vice President of Citicorp Venture Capital then
became Senior Vice president of Inco Venture Capital. Mr. Wells is a director of
Cellegy Pharmaceuticals, Identix, Inc., as well as several privately held
companies. Mr. Wells received his bachelors degree in Economics and earned a
masters degree in Business Administration from Stanford University. Mr. Wells
was previously a director of Isonics from September 1996 through December 1998.
There are no significant employees who are not also directors or executive
officers as described above. As of April 30, 1999, and subsequently, there were
and are no family relationships among the officers, directors or any person
chosen by Isonics to become a director or officer. No arrangement exists between
any of the above officers and directors pursuant to which any one of those
persons was elected to such office or position.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of Isonics Common Stock as of April 30, 2000, by: (i) each of the executive
officers named in the Summary Compensation Table; (ii) all executive officers
and directors of Isonics as a group; and (iii) all those known by Isonics to be
beneficial owners of more than five percent of its Common Stock.
This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the Securities and
Exchange Commission ("SEC"). Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, we believe that
each of the shareholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned. Applicable
percentages are based on 10,427,853 shares of Common Stock outstanding on
April 30, 2000, adjusted as required by rules promulgated by the SEC.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
- ---------------- ---------------- ----------------
<S> <C> <C>
James E. Alexander(1)....................................... 2,104,779 20.1%
Boris Rubizhevsky(2)........................................ 1,891,856 18.0%
Stephen J. Burden(3)........................................ 288,543 2.7%
Daniel J. Grady(4).......................................... 240,938 2.3%
Brantley J. Halstead(5)..................................... 141,000 1.3%
Robert H. Cuttriss(6)....................................... 307,982 3.0%
Herbert Hegener(7).......................................... 213,865 2.0%
Lindsay Gardner(8).......................................... 289,761 2.8%
Richard Parker(9)........................................... 40,000 0.4%
Larry Wells(10)............................................. 174,011 1.7%
All executive officers and directors as a group
(10 persons). The address for all of the above directors
and executives officers is: 5906 McIntyre Street, Golden,
CO 80403.................................................. 5,692,195 50.4%
Richard Grossman(11)........................................ 1,873,336 17.9%
Anfel Trading(12)........................................... 666,668 6.0%
Eagle-Picher Technologies, LLC(13).......................... 3,130,435 30.0%
</TABLE>
- ------------------------
(1) Includes (i) 25,000 shares of Common Stock underlying options which are
currently exercisable, and (ii) 45,455 shares of Common Stock held in the
name of The James & Carol Alexander Family Foundation.
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<PAGE>
(2) Includes (i) 320,468 shares of Common Stock held jointly with
Mr. Rubizhevsky's wife, (ii) 22,500 shares of Common Stock underlying
options which are currently exercisable, and (iii) 66,666 shares of Common
Stock underlying 33,333 shares of Series A Convertible Preferred Stock and
33,333 warrants to purchase Common Stock of Isonics.
(3) Includes (i) 171,429 shares of Common Stock underlying options of which
80,004 are not exercisable as of April 30, 2000, and (ii) 33,333 shares of
Common Stock underlying 33,333 shares of Convertible Preferred Stock.
(4) Includes 222,965 shares of Common Stock subject to stock options that are
currently exercisable.
(5) Includes 141,000 shares of Common Stock underlying options (of which 86,000
have vested as of April 30, 2000 and which are currently exercisable.)
(6) Includes (i) 287,982 shares of Common Stock held in the name of Metallurgy
International, Inc. In which Dr. Cuttriss and his wife, P. D. Cuttriss, are
controlling shareholders, and (ii) 20,000 shares of Common Stock underlying
options that are currently exercisable.
(7) Includes 35,000 shares of Common Stock underlying warrants which are
currently exercisable.
(8) Includes 40,000 shares of Common Stock underlying stock options that are
currently exercisable.
(9) Includes 40,000 shares of Common Stock underlying stock options which are
currently exercisable.
(10) Includes 30,000 shares of Common Stock underlying stock options which are
currently exercisable. Also includes 144,011 shares owned by Daystar
Partners, L.P. of which an affiliate owned by Mr. Wells is general
partner, and in which Mr. Wells owns a 9.9% equity interest.
(11) Includes beneficial ownership of the following shares: (i) 40,000 shares
of Common Stock underlying 20,000 shares of Convertible Preferred Stock
and 20,000 warrants owned of record and beneficially by Richard Grossman,
(ii) 40,000 shares of Common Stock underlying 20,000 shares of Convertible
Preferred Stock and 20,000 warrants owned of record and beneficially by
Orin Hirschman (of which shares Mr. Grossman disclaims beneficial
ownership), (iii) 1,106,668 shares of Common Stock underlying 553,334
shares of Convertible Preferred Stock and 553,334 warrants owned of record
and beneficially by Adam Smith Investment Partners, L.P., (iv) 226,668
shares of Common Stock underlying 113,334 shares of Convertible Preferred
Stock and 113,334 warrants owned of record and beneficially by Adam Smith
Investments, Ltd., and (v) 500,000 shares of Common Stock underlying
500,000 warrants owned of record and beneficially by Adam Smith &
Company, Inc., all as set forth on the Schedule 13D filed by such persons
on August 12, 1999. The business addresses of Richard Grossman and Orin
Hirschman, and the principal executive offices of Adam Smith Investment
Partners, L.P. and Adam Smith & Company, Inc., are located at 101 East
52(nd) Street, New York, New York 10022. The principal executive offices
of Adam Smith Investments, Ltd. are c/o Insinger Fund Administration (BVI)
Limited, Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British
Virgin Islands.
(12) Includes 666,668 shares of Common Stock underlying 333,334 shares of
Convertible Preferred Stock and 333,334 warrants. The principal executive
offices of Anfel Trading Ltd. are c/o Me. Andre Zolty, 24 Route De
Malagnou, 1208 Geneva, Switzerland.
(13) This share ownership results from Eagle-Picher's exercise of a warrant to
purchase 4,000,000 shares of our Common Stock at $3.75 per share which
resulted in Eagle-Picher acquiring 3,130,435 shares upon surrender of the
warrant. (Eagle-Picher has not accepted our calculation of the number of
shares owed, and claims that an additional 155,279 may be due. We are
continuing to discuss this with Eagle-Picher.) We paid the warrants to
Eagle-Picher in consideration of its obligation to deliver 200 kilograms
of silicon-28 to us. If Eagle-Picher does not deliver the full 200
kilograms to us by December 31, 2000, the shares held pursuant to the
exercise of the
46
<PAGE>
warrants will be proportionately reduced. The principal executive offices
of Eagle-Picher Technologies, LLC are located at 250 East Fifth Street,
Suite 500, Cincinnati, Ohio 45202.
The Series A Convertible Preferred Stock ("Series A Stock") consists of
1,830,000 shares issued with a liquidation preference and conversion right of
$1.50 per share. The Series A Stock is entitled to dividends or distributions
equal to the amount of the dividend or distribution per share of Common Stock
payable at such time multiplied by the number of shares of Common Stock then
obtainable upon conversion of such Series A Stock. The Redemption Trigger Date
for the Series A Stock shall be the business day immediately following the
thirtieth consecutive trading day that the average closing price during such
trading days (or, if no closing price is reported, the average of the bid and
ask prices) of the shares of Common Stock was above $8.00 per share (which
minimum price shall be proportionally adjusted for stock splits, stock
dividends, reverse stock splits and any other subdivision or combination of the
Common Stock). After the Redemption Date, we may redeem all or any part of the
Series A Stock at its election at any time and from time to time. The Series A
Stock is convertible into Common Stock at the option of the holder until we, if
at all, choose to redeem such shares on the basis of one share of Common Stock
per share of Series A Stock and, until converted, each share of Series A Stock
is entitled to one vote at any meeting of the shareholders of Isonics.
We know of no arrangement, the operation of which may, at a subsequent date,
result in change in control of Isonics.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
SECTION 16(a) DISCLOSURE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires Isonics' directors, executive officers and persons who own more than
ten percent of a registered class of Isonics' equity securities, to file with
the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of Isonics. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
Isonics with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to our and written representations that no other reports were
required, during the fiscal year ended April 30, 1999, and subsequently, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with exception (or in
addition) to the following:
1. Mr. Rubizhevsky filed a Form 4 in February 2000 reporting a purchase
that took place in July 1999. Mr. Rubizhevsky also filed a Form 4 after
April 10, 2000 to report a sale of 1,000 shares made in March 2000.
2. Mr. Parker filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became a director of
Isonics in August 1998.
3. Dr. Cuttriss and his affiliate, Metallurgy International, Inc., jointly
filed a Form 3 in February 2000. Dr. Cuttriss became subject to the
Section 16(a) reporting requirements when he became an executive
officer of Isonics in May 1998. A joint filing of two Form 4s was also
made in February 2000 reporting transactions that occurred in July and
September of 1999. These transactions indicated that Dr. Cuttriss may
have obtained a short-swing profit of $4,218.00. Dr. Cuttriss resolved
this alleged liability to Isonics in February 2000 by paying Isonics
$500.00 and entering into a promissory note for the balance payable
with interest over eight quarters beginning June 1, 2000, at the rate
of $499.92 per quarter.
4. Mr. Halstead filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became an executive
officer of Isonics in March 1999.
47
<PAGE>
5. Dr. Burden filed a Form 3 in February 2000. He became subject to the
Section 16(a) reporting requirements when he became an executive
officer of Isonics in January 1999. Dr. Burden also filed a Form 4 in
February 2000 reporting a purchase that took place in July 1999.
Dr. Burden filed a Form 4 after April 10, 2000, reporting an exercise
of warrants that occurred in March 2000.
6. Mr. Herbert Hegener filed a Form 3 in February of 2000. He became
subject to the Section 16(a) reporting requirements when he became an
executive officer of Isonics' subsidiary, Chemotrade, Inc., in
June 1998. Mr. Hegener filed a Form 4 in February 2000, reporting a
warrant acquired in June 1999.
7. Eagle-Picher Technologies, LLC became subject to the Section 16(a)
reporting requirements when it became a greater than 10% beneficial
owner in December of 1999. Eagle Picher filed a Form 3 in March 2000.
Eagle-Picher exercised warrants in March 2000 but, to our knowledge has
not yet filed a Form 4 reporting the exercise; Eagle-Picher has also
not yet filed an amendment to its Schedule 13D reporting this exercise.
8. Mr. Paul Catuna, a former executive officer of Isonics, was subject to
the reporting requirements of Section 16(a) of the 1934 Act during the
course of his employment. Mr. Catuna has filed a Form 4 in
February 2000, reporting a stock bonus received in January 1999.
9. Mr. Wells filed a Form 4 after April 10, 2000, reporting that an
affiliated entity exercised warrants in March 2000.
10. Ms. Gardner exercised warrants in March 2000, but has not yet filed a
Form 4 reporting that exercise. Ms. Gardner has advised Isonics that
she will file that Form 4 in May 2000.
In addition to the foregoing, several directors and executive officers filed
Form 4s in February 2000, which voluntarily reported the acquisition of certain
Common Stock options that are exempt from the reporting requirements pursuant to
Rule 16b-3.
(a) Mr. Alexander voluntarily filed three Form 4s in February 2000 reporting
transactions that took place in January, April, and December of 1999. The
Board of Directors approved the January and April transactions in minutes
effective October 31,1999.
(b) Mr. Rubizhevsky voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in January and April 1999. The January and
April transactions were approved by the Board of Directors in minutes
effective October 31,1999.
(c) Ms. Gardner voluntarily filed one Form 4 in February 2000 reporting
transactions that took place in May and October of 1998.
(d) Mr. Parker voluntarily filed a Form 4 in February 2000 reporting
transactions that occurred in October 1998.
(e) Mr. Halstead voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in April 1999 and in January 2000. The Board
of Directors approved these transaction in minutes effective
October 31,1999, and in January 30, 2000.
(f) Dr. Burden voluntarily filed one Form 4 in February 2000 reporting a
transaction that took place in April 1999. The Board of Directors
approved this transaction in minutes effective October 31,1999.
(g) Dr. Grady voluntarily filed two Form 4s in February 2000 reporting
transactions that took place in January and April 1999 and were approved
by the Board of Directors in minutes effective October 31,1999.
48
<PAGE>
SHORT-SWING LIABILITY
Dr. Cuttriss and his affiliate, Metallurgy International, Inc., as a result
of selling and acquiring shares in July and September of 1999 respectively, may
have obtained a short-swing profit of $4,218.00. Dr. Cuttriss resolved this
alleged liability to Isonics in February 2000 by paying Isonics $500.00, and
entering into a promissory note for the balance payable with interest over eight
quarters beginning June 1, 2000, at the rate of $499.92 per quarter.
In February 2000, Dr. Cuttriss and his affiliate, Metallurgy
International, Inc. sold additional shares of Isonics Common Stock at prices
higher than he received earlier. As a result, he increased his Section 16(b)
liability and obtained a short-swing profit of $30,187.50 which Dr. Cuttriss has
paid (also resulting in the cancellation of the promissory note described in the
preceding paragraph). In March 2000 Metallurgy International made further sales
which resulted in an additional short-swing profit of $48,062.50. Dr. Cuttriss
has had his personal legal counsel investigating this matter and has received a
preliminary opinion from such counsel that the September 1999 purchase was
completed by the broker-dealer in error and should not form the basis for a
matching transaction under Section 16(b). We will cooperate with Dr. Cuttriss in
this matter and if we receive a satisfactory legal opinion from Dr. Cuttriss'
counsel, amended Forms 4 filed with the Securities and Exchange Commission which
eliminates the Section 16(b) liability, and if Dr. Cuttriss meets certain other
requirements, we will refund to Dr. Cuttriss the payments he has made. If we do
not receive a satisfactory legal opinion or if Dr. Cuttriss does not meet
certain other requirements we have imposed, we will seek payment in full of all
amounts remaining due no later than May 31, 2000.
49
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation awarded,
paid to, or earned by the chief executive officer and the other principal
officers of Isonics for the three years ended April 30, 1997, 1998, and 1999. No
other person who is currently an executive officer of Isonics earned salary and
bonus compensation exceeding $100,000 during any of those years. This includes
all compensation paid to each by Isonics and any subsidiary.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------------------
AWARDS PAYOUT
----------------------- --------
ANNUAL COMPENSATION SECURITIES
------------------------------ ($) UNDERLYING
FISCAL ($) ($) ($) RESTRICTED OPTIONS & LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(A) AWARDS SARS (#) PAYOUT COMPENSATION
- --------------------------- -------- -------- -------- -------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James E. Alexander` ............. 1997 174,000 0 0 0 0 0 0
President & CEO 1998 204,870 0 60,553(b) 0 0 0 0
1999 200,000 50,000 35,016(b) 0 25,000(e) 0 0
2000 212,000 199,092 12,737 0 0 0 0
Boris Rubizhevsky ............... 1997 147,000 0 0 0 0 0 0
Senior Vice President 1998 176,975 0 25,946(b) 0 0 0 0
1999 184,100 45,000 25,404(b) 0 22,500(f) 0 0
2000 125,000 15,902 7,550 0 0 0 0
Daniel J. Grady ................. 1997 107,000 0 0 0 0 0 0
Vice President 1998 125,603 0 0 0 0 0 0
1999 127,188 16,000 0 0 15,625(g) 0 0
2000 125,000 22,291 11,813 0 0 0 0
Stephen J. Burden ............... 1997 N/A N/A N/A N/A 71,459(h) N/A N/A
Vice President(c) 1998 N/A N/A N/A N/A N/A N/A N/A
1999 0 0 0 0 121,458(i) 0 0
2000 125,000 15,902 7,550 0 0 0 0
Robert H. Cuttriss .............. 1997 N/A N/A N/A N/A N/A N/A N/A
President of Interpro(d) 1998 N/A N/A N/A N/A N/A N/A N/A
1999 92,872 80,000 0 0 20,000(j) 0 0
2000 104,815 0 3,144 0 0 0 0
</TABLE>
- ------------------------------
(a) Excludes other compensation, the aggregate amount of which does not exceed
the lesser of $50,000 or 10% of such named Executive Officers' annual
compensation.
(b) Mr. Alexander's amounts represent $35,016 for interest and taxes payable as
a result of a loan in fiscal year 1999, and $60,553 for interest and taxes
payable as a result of a loan in fiscal year 1998. Mr. Rubizhevsky's amounts
represent $25,404 for interest and taxes payable as a result of a loan in
fiscal year 1999, and $25,946 for interest and taxes payable as a result of
a loan in fiscal year 1998.
(c) Dr. Burden became an officer of Isonics effective January 1999.
(d) Interpro was acquired effective April 30, 1998. Prior to May 1, 1998,
Dr. Cuttriss was not an Isonics employee. The bonus paid to Dr. Cuttriss in
fiscal year 1999 was for back pay accrued prior to the acquisition of
Interpro by Isonics.
(e) Options to purchase 25,000 shares of Common Stock were granted in
April 1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1 7/16 per share and expire April 26, 2004.
(f) Options to purchase 22,500 shares of Common Stock were granted in
April 1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1 7/16 per share and expire April 26, 2004.
(g) Options to purchase 15,625 shares of Common Stock were granted in
April 1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1 7/16 per share and expire April 26, 2004.
50
<PAGE>
(h) Options to purchase 71,429 shares of Common Stock were granted upon
beginning employment with Isonics (of which 46,425 have vested as of
April 30, 2000, and continue to vest at a rate of 5% per quarter) in
January 1997. Dr. Burden was not an executive officer at the time of this
award. Dr. Burden became an executive officer in January 1999.
(i) Options to purchase 100,000 shares of Common Stock were granted in
January 1999 as consideration for Dr. Burden's promotion to vice president
in January 1999, with an exercise price of $1.10 per share (of which 45,000
have vested as of April 30, 2000, and continue to vest at a rate of 5% per
quarter). Options to purchase 21,458 shares of Common Stock were granted in
April 1999 as consideration for delaying salary in March and April 1999, and
are currently exercisable at $1 7/16 per share and expire April 26, 2004.
(j) Options granted in May 1998 in connection with the acquisition of Interpro
by Isonics are currently exercisable at $2.00 per share and expire May 1,
2003.
In October 1996, we adopted an employee benefit plan under Internal Revenue
Code Section 401(k). The 401(k) plan is a profit sharing plan under which both
employees and Isonics are entitled (at their own discretion) to contribute a
portion of compensation and earnings, respectively, to investment funds to
supplement employee retirement benefits. On November 1, 1999, the Isonics
Corporation 401(k) plan was merged with the Interpro 401(k) plan.
We do not have written plans to pay bonuses or deferred compensation to our
employees except those expressly stated in the following sections.
We have adopted medical, dental, and life insurance plans for our employees
and their dependents at our cost. In some cases, we also provide discretionary
disability and other insurance plans for the benefit of our employees.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
AGREEMENTS
In September 1997, we entered into employment agreements with James E.
Alexander and Boris Rubizhevsky. The agreements have a term of four years and
provide for annual salaries of $200,000 and $180,000, respectively, although
either Isonics or the individuals may terminate these agreements prematurely in
their discretion. By resolution of the Board made on January 30, 2000, both
Mr. Alexander and Mr. Rubizhevsky received salary increases commencing
February 1, 2000, equal to 20% of their current salary. The salary increases
were granted in recognition of their performance for Isonics and the fact that
neither Mr. Alexander nor Mr. Rubizhevsky had received a salary increase in
approximately two and one-half years. Under the agreements, the officer is
entitled to receive incentive compensation up to 50% of the officer's annual
salary, as approved by Isonics pursuant to such executive compensation plan as
Isonics may approve. The agreements provide that upon a termination of
employment other than for cause (as defined in the agreements), the officer is
entitled to severance compensation of 18 months of his salary, paid at the same
time as salary payments, 25% of the officer's annual prevailing salary, paid
upon termination, and in addition all outstanding stock options held by the
officer will be accelerated and will become exercisable in full and our right of
repurchase will terminate with respect to such shares. The agreements provide
for similar accelerated vesting of outstanding stock options upon a change in
control of Isonics.
We have also entered into employment agreements with Dr. Daniel J. Grady and
Dr. Stephen J. Burden. The agreements have an indefinite term and provides for
at-will employment, terminable at any time by either party. The agreements
provide for a rate of annual compensation, which we will review annually. Under
the each agreement, Dr. Grady and Dr. Burden are entitled to participate in our
standard plans and policies. The agreements also include confidentiality and
invention assignment provisions. Additionally, Mr. Herbert Hegener and
Dr. Robert Cuttriss are covered by an employment agreements extending through
the September 2001 and September 2003, respectively.
Mr. Brantley J. Halstead was hired as Chief Financial Officer in
March 1999. Mr. Halstead has entered into an employment agreement with us. The
agreement has an indefinite term and provides for
51
<PAGE>
at-will employment, terminable at any time by either party. The agreement
provides for a rate of annual compensation of $96,000, which we will review
annually. Under the agreement, Mr. Halstead is entitled to participate in our
standard plans and policies. The agreement also includes confidentiality and
invention assignment provisions.
STOCK OPTIONS AND OPTION PLANS
We grant options to executive officers, employees and consultants under the
following plans (collectively the "Plans"):
(a) 1996 Stock Option Plan which has been terminated, but as to which, there
are options outstanding.
(b) 1996 Executives' Equity Incentive Plan (the "Executives' Plan")
authorized the grant of options to purchase 225,000 stock options, which
after being adjusted for stock splits that occurred following the
adoption of the plan resulted in 570,000 shares. The options granted may
be either incentive stock options if they meet the requirements of
Section 422 of the Internal Revenue Code, or non-qualified stock options.
The directors approved this plan in September 1996 and the shareholders
in October 1996.
(c) 1996 Equity Incentive Plan (the "Employees' Plan") authorized the grant
of options to purchase 50,000 stock options, which after being adjusted
for stock splits that occurred following the adoption of the plan
resulted in 150,000 shares. The options granted may be either incentive
stock options if they meet the requirements of Section 422 of the
Internal Revenue Code, or non-qualified stock options. The directors
approved this plan in September 1996 and the shareholders in
October 1996.
(d) 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") authorized
employee purchase of up to 200,000 shares of Isonics Common Stock. The
directors approved this plan in August 1998, and the shareholders in
October 1998.
As of April 30, 2000, options to purchase a total of 380,583 shares, 129,638
shares, and 488,356 shares respectively, were outstanding under the Executives'
Plan, Employees' Plan, and 1996 Stock Option Plan, and options to purchase
189,417, 20,362, and 0 shares, respectively, remained available for grant.
We have not adopted any other stock option or stock appreciation rights
plan.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following options were granted to executive officers named in the
compensation table during the fiscal year ended April 30, 1999. We did not grant
any stock appreciation rights to any person during fiscal year 1999 or
subsequently. There was no exercise of options or SARs during the fiscal year
ended April 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/ SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE PRICE
NAME AND PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- --------------------------- ------------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
James E. Alexander ...................... 25,000 7.1% 1$7/16 April 2004
President & CEO
Boris Rubizhevsky ....................... 22,500 6.3% 1$7/16 April 2004
Senior Vice President
Daniel J. Grady ......................... 15,625 4.4% 1$7/16 April 2004
Vice President
Stephen J. Burden ....................... 21,458 33.9% 1$7/16 April 2004
Vice President 100,000 $1.10 January 2004
Robert H. Cuttriss ...................... 20,000 5.6% $2.00 April 2003
President of Interpro
</TABLE>
52
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
No officer exercised employee stock options during the fiscal year ended
April 30, 1999, or subsequently. The following table sets forth information
regarding the year-end value of options being held by the Chief Executive
Officer and the other such named officers and persons on April 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS/SARS AT MONEY OPTIONS/SARS AT
ACQUIRED ON VALUE APRIL 30, 1999 APRIL 30, 1999
NAME AND PRINCIPAL POSITION EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------- ------------ -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
James E. Alexander ............ 0 0 25,000/0 $53,125.00/$0.00
President & CEO(a)
Boris Rubizhevsky ............. 0 0 22,500/0 $47,812.50/$0.00
Senior Vice President(a)(b)
Daniel J. Grady ............... 0 0 222,965/0 $651,851.78/$0.00
Vice President(a)
Stephen J. Burden ............. 0 0 78,599/114,288 $166,991/$257,822
Vice President
Robert H. Cuttriss ............ 0 0 20,000/0 $31,350/$0
President of Interpro
</TABLE>
- ------------------------
(a) Does not include 45,455 shares of Common Stock awarded to Mr. Alexander,
36,364 shares of Common Stock awarded to Mr. Rubizhevsky, and 14,545 shares
of Common Stock awarded to Dr. Grady in January 1999. These were stock
grants and not grants of stock options.
(b) Does not include 33,333 warrants obtained in a private transaction completed
in July 1999.
LONG TERM INCENTIVE COMPENSATION PLANS, AND DEFINED BENEFIT AND ACTUARIAL PLANS
Isonics has no long term incentive compensation plans, defined benefit
plans, or actuarial plans.
COMPENSATION OF DIRECTORS
The directors of Isonics were not compensated for their services during
fiscal year 1999, or subsequently during calendar year 1999. However, each
director was reimbursed for travel and related expenses associated with Board of
Directors' meetings. In January 2000, it was agreed to compensate non-employee
directors $2,000 for attending Board of Directors' meetings in person and $500
for attending Board of Directors' meetings telephonically beginning January 1,
2000.
The 1998 Directors' Plan (the "Directors' Plan") authorized each person
serving as a member of the Board who is not an employee of Isonics to receive
options to purchase 20,000 shares of Isonics Common Stock when such person
accepts his position as a Director and to receive an additional option to
purchase 10,000 shares when such person is re-elected as a Director provided
such person is not an employee of Isonics. The exercise price for the options is
the Fair Market Value (as defined in the Executives' Plan) on the date such
person becomes a director and the options are exercisable for five years from
such date. The options granted under the Directors' plan vest immediately upon
the date of the grant. In the event a Director resigns or is not re-elected to
the Board, failure to exercise the options in three months results in the
options' termination prior to the expiration of their term. Although the
Directors adopted the plan in 1998, the Board formalized the plan by resolution
in January 2000.
Under the Directors' Plan the following individuals have been granted
options:
(a) On May 21, 1998, Lindsay Gardner received 20,000 options exercisable at
$2.3750 per share through May 21, 2003.
53
<PAGE>
(b) On August 1, 1998, Richard Parker received 20,000 options exercisable at
$1.65 per share through August 1, 2003.
(c) On October 5, 1998, as a result of their re-election to the Board of
Directors Ms. Gardner and Mr. Parker each received options to acquire an
additional 10,000 shares exercisable at $1.1875 per share through
October 5, 2003.
(d) On January 30, 2000, Larry J. Wells received 20,000 options exercisable at
$7.3125 per share through January 29, 2005.
(e) On April 26, 2000, following their re-election as directors at our annual
meeting of shareholders, we granted options to purchase 10,000 shares to
each of Ms. Gardner and Messrs. Parker and Wells. These options are
exercisable at $6.125 per share through April 26, 2005.
As of April 30, 2000, options to purchase a total of 110,000 shares were
outstanding under the Directors Plan. We do not have any other arrangements
pursuant to which it compensates the Directors for acting in their capacities as
such.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets out information regarding transactions between officers,
directors and significant shareholders of Isonics during the most recent two
fiscal years and during the subsequent fiscal year.
CORPORATE LOANS TO OFFICERS
During the fiscal years ended April 30, 1998 and 1999, we had loans
outstanding to two officers. The funds had been advanced to the officers to
allow them to exercise options prior to our Initial Public Offering. The options
were exercised in September 1996, in part, to allow us to establish a pool of
shares available for future awards pursuant to the Plans in amounts that comply
with the guidelines established by certain state blue sky authorities. Interest
was charged on these loans at a rate of 6.6% per annum. In minutes effective
October 31, 1999 and January 30, 2000, the Board of Directors agreed to forgive
a portion of the current interest and principal due and to accept Isonics Common
Stock, owned by the officers, in payment of the remaining balance owed. The
amount owed by Mr. Alexander, that was forgiven by the Board of Directors, in
October 1999, was $74,038.54. The amount owed by Mr. Rubizhevsky, that was
forgiven by the Board of Directors, in October 1999, was $60,534.23. In both
cases the amount forgiven was treated as bonus compensation to Mr. Alexander and
Mr. Rubizhevsky. Both officers surrendered 30,437 shares of Isonics Common Stock
each to pay off $175,012.33 in accumulated interest and principal ($10,012.33 in
interest and $165,000.00 in principal each). As of April 30, 2000 we had no
loans receivable outstanding with our officers or employees. Please refer to the
following schedule.
<TABLE>
<CAPTION>
JAMES E. ALEXANDER BORIS RUBIZHEVSKY
PRESIDENT & CEO SENIOR VICE PRESIDENT
------------------ ---------------------
<S> <C> <C>
Balance as of May 1, 1997................................. $198,570.46 $167,570.46
FY 1998 Borrowings(a)..................................... 86,662.35 59,812.86
FY 1998 Repayments(a)..................................... 53,207.42 4,040.88
----------- -----------
Balance as of April 30, 1998.............................. $232,025.39 $223,342.44
FY 1999 Borrowings(a)..................................... 8,360.78 3,750.51
FY 1999 Repayments(a)..................................... 4,025.79 3,767.73
----------- -----------
Balance as of April 30, 1999.............................. $236,360.38 $223,325.22
FY 2000 Borrowings(a)..................................... 7,690.49 7,221.34
FY 2000 Repayments(a)..................................... 244,050.87 230,546.56
----------- -----------
Balance as of Feb. 10, 2000............................... $ 0.00 $ 0.00
</TABLE>
- ------------------------
(a) Includes interest accrued and paid. Amounts are aggregated.
54
<PAGE>
CORPORATE LOANS FROM OFFICERS AND EMPLOYEES
On occasion during the fiscal years ended April 30, 1998 and 1999, officers
and employees of Isonics loaned Isonics funds. The following schedule summarizes
these borrowing and repayments.
<TABLE>
<CAPTION>
BALANCE AS OF FY 1998 FY 1998 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1 1997 BORROWINGS(A) REPAYMENTS(A) APRIL 30, 1998
- --------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
James E. Alexander........................ $ 0.00 $ 25,000.00 $ 25,000.00 $0.00
President & CEO
Boris Rubizhevsky......................... $ 0.00 $ 0.00 $ 0.00 $0.00
Senior Vice President
Daniel J. Grady........................... $ 0.00 $ 15,600.00 $ 15,600.00 $0.00
Vice President
Stephen J. Burden......................... $ 0.00 $ 86,821.92 $ 86,821.92 $0.00
Vice President(b)
Lindsay Gardner........................... $ 0.00 $122,880.28 $122,880.28 $0.00
Director(c)
Jacques J. Delente(d)..................... $150,000.00 $ 13,020.55 $163,020.55 $0.00
</TABLE>
- ------------------------
(a) Includes interest accrued and paid through April 30, 1998. Amounts are
aggregated.
(b) Dr. Burden was also granted warrants exercisable for 40,951 shares of Common
Stock issued in connection with a private placement (the "Placement I") of
12% nonconvertible promissory notes and warrants to purchase Isonics Common
Stock in September 1997.
(c) Ms. Gardner was also granted warrants exercisable for 91,001 shares of
Common Stock issued in connection with Placement I of 12% nonconvertible
promissory notes and warrants to purchase Isonics Common Stock in
September 1997.
(d) Dr. Delente was also granted warrants exercisable for 122,853 shares of
Common Stock issued in connection with Placement I of 12% nonconvertible
promissory notes and warrants to purchase Isonics Common Stock in
September 1997.
<TABLE>
<CAPTION>
BALANCE AS OF FY 1999 FY 1999 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1, 1998 BORROWINGS(A) REPAYMENTS(A) APRIL 30, 1999
- --------------------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
James E. Alexander........................ $0.00 $ 0.00 $ 0.00 $ 0.00
President & CEO
Boris Rubizhevsky......................... $0.00 $44,290.20 $ 0.00 $44,290.20
Senior Vice President
Daniel J. Grady........................... $0.00 $47,100.00 $47,100.00 $ 0.00
Vice President
Stephen J. Burden......................... $0.00 $ 0.00 $ 0.00 $ 0.00
Vice President
Lindsay Gardner........................... $0.00 $ 0.00 $ 0.00 $ 0.00
Director
Jacques J. Delente........................ $0.00 $93,000.00 $48,000.00 $45,000.00
</TABLE>
- ------------------------
(a) Includes interest accrued and paid through April 30, 1999. Amounts are
aggregated.
55
<PAGE>
<TABLE>
<CAPTION>
BALANCE AS OF FY 2000 FY 2000 BALANCE AS OF
NAME AND PRINCIPAL POSITION MAY 1, 1999 BORROWINGS(A) REPAYMENTS(A) FEB. 29, 2000
- --------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
James E. Alexander......................... $ 0.00 $ 0.00 $ 0.00 $0.00
President & EO
Boris Rubizhevsky.......................... $44,290.20 $ 8,858.04 $53,214.24 $0.00
Senior Vice President(b)
Daniel J. Grady............................ $ 0.00 $ 0.00 $ 0.00 $0.00
Vice President
Stephen J. Burden.......................... $ 0.00 $57,500.00 $57,500.00 $0.00
Vice President(c)
Lindsay Gardner............................ $ 0.00 $ 0.00 $ 0.00 $0.00
Director
Jacques J. Delente......................... $45,000.00 $13,500.00 $58,500.00 $0.00
</TABLE>
- ------------------------
(a) Includes interest accrued and paid through April 30, 2000. Amounts are
aggregated.
(b) Mr. Rubizhevsky's note to Isonics was converted into 66,666 shares of Common
Stock underlying 33,333 shares of Series A Convertible Preferred Stock and
33,333 warrants issued in connection with a second private placement (the
"Placement II") of Series A Convertible Preferred Stock and warrants to
purchase Isonics Common Stock on July 30, 1999.
(c) Dr. Burden's note to Isonics was converted into 66,666 shares of Common
Stock underlying 33,333 shares of Series A Convertible Preferred Stock and
33,333 warrants issued in connection with Placement II on July 30, 1999.
Mr. Hegener had a loan payable to him from Isonics in the amount of $438,314
resulting from the 1998 purchase of Chemotrade by Isonics. Isonics issued to
Mr. Hegener 35,000 warrants to purchase Common Stock at $3.00 per share through
June 30, 2004 to compensate him for a late loan payment.
ISONICS' CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of Common Stock
and 10,000,000 shares of Preferred Stock. As of April 30, 2000, there were
outstanding 10,427,853 shares of Common Stock and 1,830,000 shares of Series A
Convertible Preferred Stock. As of that date, there were also outstanding
options issued pursuant to our employee benefit plans to purchase a total of
1,108,577 shares, and other options and warrants to purchase a total of
5,575,786 shares of Common Stock. The number of outstanding shares includes
3,130,435 shares issued to Eagle-Picher pursuant to an exercise of a warrant to
purchase 4,000,000; these shares are subject to forfeiture to the extent that
Eagle-Picher does not deliver 200 kilograms of silicon-28 meeting certain
specifications to Isonics by December 31, 2000. As discussed above, Eagle-Picher
believes that we should issue it an additional 155,279 shares, although we
dispute this calculation and we are continuing to discuss this matter.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine.
Each shareholder is entitled to one vote for each share of Common Stock held
on all matters submitted to a vote of shareholders.
56
<PAGE>
Cumulative voting for the election of directors is specifically authorized
by the Bylaws. Under cumulative voting for the election of directors, upon a
proper and timely request by a shareholder, each shareholder is entitled to cast
a number of votes equal to the number of shares held multiplied by the number of
directors to be elected. The votes may be cast for one or more candidates. Thus,
under cumulative voting, a majority of the outstanding shares will not
necessarily be able to elect all of the directors, and minority shareholders may
be entitled to greater voting power with respect to election of directors than
if cumulative voting did not apply.
The Bylaws provide that so long as we are a "listed company" as defined by
applicable California law, there will not be cumulative voting in connection
with the election of directors. At the present time, we are not a "listed
company" as defined in California law, and therefore cumulative voting will
continue to apply in connection with the election of directors.
The Common Stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon liquidation, dissolution or winding up of
Isonics, the remaining assets legally available for distribution to
shareholders, after payment of claims or creditors and payment of liquidation
preferences, if any, on outstanding Preferred Stock, are distributable ratably
among the holders of the Common Stock and any participating Preferred Stock
outstanding at that time. Each outstanding share of Common Stock is fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by California law, to provide for the issuance of shares of Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the rights, preferences and privileges of
the shares of each unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by the shareholders. The Board
of Directors may authorize the issuance of Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Common Stock. Thus, the issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of Isonics.
We have issued 1,830,000 shares of our Series A Convertible Preferred Stock.
This Preferred Stock may be converted to common shares of Isonics stock at a
fixed conversion price of $1.50 per share, which would result in the exchange of
one share of Common Stock for each share of Series A Convertible Preferred
Stock. This conversion ratio is subject to dilution adjustments. The Series A
Convertible Preferred Stock is entitled to receive dividends on a
share-for-share basis with the shares of Common Stock except in the case of a
"Silicon Isotope Transaction" as defined in the Certificate of Determination
that was filed with the California Secretary of State to create the Series A
Convertible Preferred Stock. If a "Silicon Isotope Transaction" occurs, the
holders of Series A Convertible Preferred Stock have certain additional rights.
The Series A Convertible Preferred Stock is entitled to a liquidation preference
of $1.50 per share.
CLASS A WARRANTS
Class A Warrants to purchase Common Stock were issued in September 1997 and
are registered pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. The following is a brief summary of certain provisions of the
Warrants.
We issued Class A Warrants to purchase an aggregate of 810,000 shares of
Common Stock. We have also reserved 810,000 shares for issuance upon exercise of
the Class A Warrants. Each Class A Warrant entitles the registered holder
thereof to purchase one share of Common Stock at a price of
57
<PAGE>
$5.80, subject to adjustment, through September 21, 2001. After expiration, the
Warrants will be void and of no value.
We may redeem the Warrants at a price of $.10 per Warrant on not less than
30 days' prior written notice if the average of the last reported bid and asked
prices of the Common Stock (if the Common Stock is then traded in the
over-the-counter market) or the last reported sale price of the Common Stock (if
the Common Stock is then traded on a national securities exchange or the Nasdaq
National Market or SmallCap Market) has been at least $14.50 per share (subject
to adjustment) for at least 20 consecutive trading days ending within three days
prior to the date on which notice of redemption is given.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price and number of shares issuable upon
exercise, on the occurrence of certain events, such as stock dividends, stock
splits and recapitalizations. We are not required to issue fractional shares. In
lieu of the issuance of such fractional shares, we will pay cash to such holders
of the Warrants. In computing the cash payable to such holders, a share of
Common Stock will be valued at its price immediately prior to the close of
business on the expiration date. The holder of a Warrant will not possess any
rights as a shareholder of Isonics unless such shareholder exercises such
Warrant.
CLASS B AND C WARRANTS
No Class B Warrants have yet been issued, but they will be issued to holders
of our Class A Warrants who accept the exchange offer.
No Class C Warrants have yet been issued, but they will be issued to persons
who exercise their Class A Warrants prior to the expiration of the exchange
offer, or who exercise their Class B Warrants prior to their expiration. The
Class C Warrants will also be registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended.
The Class B Warrants and the Class C Warrants contain provisions that
protect the holders thereof against dilution by adjustment of the exercise price
and number of shares issuable upon exercise, on the occurrence of certain
events, such as stock dividends, stock splits and recapitalizations. We are not
required to issue fractional shares. In lieu of the issuance of such fractional
shares, we will pay cash to such holders of the Warrants. In computing the cash
payable to such holders, a share of Common Stock will be valued at its price
immediately prior to the close of business on the expiration date. The holder of
a Warrant will not possess any rights as a shareholder of Isonics unless such
shareholder exercises such Warrant.
The material terms and conditions of the Class B Warrants and the Class C
Warrants are summarized above in "The Exchange Offer."
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 22, 1997, our Units (consisting one share of Common Stock and
one Class A Warrant) started trading on the Over The Counter (OTC) Bulletin
Board under the symbol ISONU. In October 1997, we unbundled the Units and the
Common Stock and Class A Warrants commenced trading on the OTC Bulletin Board
under the symbols ISON and ISONW, respectively.
The following table sets forth the high and low bid prices for the Common
Stock and the Class A Warrants (quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and
58
<PAGE>
may not represent actual transactions) from September 22, 1997 through
January 31, 2000 as reported by OTC Bulletin Board.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
JULY 31, 1999 OCT. 31, 1999 JAN. 31, 2000 APR. 30, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Common Stock (ISON)
High....................... 3 5/8 2 1/8 10 1/2 17 15/16
Low........................ 1 7/8 7/8 1 5 9/16
Class A Warrants (ISONW)
High....................... 13/16 1/2 3 15/16 13 5/8
Low........................ 1/2 3/16 1/4 3
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
JULY 31, 1998 OCT. 31, 1998 JAN. 31, 1999 APR. 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Common Stock (ISON)
High....................... 2 23/32 1 29/32 2 3 9/16
Low........................ 1 21/32 1 1/32 25/32 1 7/16
Class A Warrants (ISONW)
High....................... 3/4 7/16 3/8 3/4
Low........................ 9/32 3/16 3/32 9/32
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
JULY 31, 1997 OCT. 31, 1997 JAN. 31, 1998 APR. 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Common Stock (ISON)
High....................... -- 8 3/8 5 5/8 3
Low........................ -- 5 1/2 1/4 1 13/16
Class A Warrants (ISONW)
High....................... -- 2 3/4 2 1/4 11/16
Low........................ -- 1 3/8 0.01 1/8
</TABLE>
As of March 15, 2000, there were approximately 250 holders of record of our
Common Stock. This does not include an indeterminate number of persons who hold
our Common Stock in brokerage accounts and otherwise in "street name.'
We have never declared or paid a cash dividend on our Common Stock. We
presently intend to retain our earnings to fund development and growth of our
business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future. Additionally, the certificate of designation for the
Series A Convertible Preferred Stock contains restrictions on our ability to pay
dividends to holders of our Common Stock.
SHARES AVAILABLE FOR FUTURE SALE
The market price of our Common Stock could drop if substantial amounts of
shares are sold in the public market or if the market perceives that such sales
could occur. A drop in the market price could adversely affect holders of the
stock and could also harm our ability to raise additional capital by selling
equity securities. The securities that may be sold from time to time under this
prospectus represent a market overhang.
As of April 30, 2000, we had outstanding options, warrants and convertible
securities for the purchase of up to approximately 6,684,363 shares of Common
Stock at an average price of $2.54 per share, representing approximately 39% of
our outstanding shares of Common Stock on a fully-diluted
59
<PAGE>
basis. The perception that these instruments may be exercised for or converted
into Common Stock that then could be sold into the public market could adversely
affect the market price of our Common Stock. In addition, we have entered into
registration rights agreements with certain of our stockholders entitling them
to include their shares of Common Stock in registration statements for
securities filed by Isonics under the Securities Act of 1933, as amended.
Awareness of the existence of these registration rights could lead to a
perception that sales of the shares subject to the registration rights could
occur, which could materially and adversely affect our stock price or could
impair our ability to obtain capital through sales of equity securities. In
addition, shares we have issued in private transactions over the past two years
will become eligible for sale in the public market under SEC Rule 144.
These shares are restricted securities as defined in Rule 144. Under that
rule, a stockholder who owns restricted shares that have been outstanding for at
least one year is entitled to sell, within any three-month period, a number of
restricted shares that does not exceed the greater of: (i) 1% of the then
outstanding shares of Common Stock, or approximately 104,278 shares as of
April 30, 2000; and (ii) an amount equal to the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the sale.
SECURITIES AND EXCHANGE POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
The Articles of Incorporation of Isonics require it to indemnify its
officers, directors, employees and agents against certain liabilities incurred
by them in those capacities if they acted in good faith and reasonably believed
their conduct was in the best interests of Isonics or not opposed to it. Isonics
is also required to indemnify a person who is or was a director, officer,
employee or agent of Isonics and who was successful, on the merits or otherwise,
in defense of any proceeding to which he was a party, against reasonable
expenses, which include attorneys' fees, incurred by him or her in connection
with the proceeding.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Isonics under the provisions discussed in the previous paragraph, or otherwise,
Isonics has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable.
EXPERTS
The consolidated balance sheets as of April 30, 1998 and 1999, and the
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended, have been audited by Grant Thornton LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
LEGAL MATTERS
Certain legal matters, including the validity of the shares of Common Stock
offered hereby, have been passed upon for Isonics by Norton-Lidstone, P.C.,
Englewood, Colorado. Norton-Lidstone, P.C., will rely as to matters of
California law on an opinion of Arter & Hadden, LLP, Los Angeles, California.
HOW TO OBTAIN ADDITIONAL INFORMATION
We file annual, quarterly, proxy statements, and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
document we have filed with the SEC in its public reference room at 450 Fifth
Street N.W. Washington, D.C. 20549. You may obtain
60
<PAGE>
information on the operation of the public reference room by calling the SEC at
1-800-432-0330. The SEC maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding companies, including those that Isonics files
electronically with the SEC.
We also furnish Annual Reports to our shareholders that contain audited
financial information.
This prospectus is part of a registration statement (on Form S-4) we have
filed with the SEC relating to this exchange offer and our Common Stock
described in this prospectus. As permitted by the SEC rules, this prospectus
does not contain all of the information contained in the registration,
accompanying exhibits and schedules we file with the SEC. You may refer to the
registration, the exhibits and schedules for more information about our Company
and our Common Stock. The registration statement, exhibits, and schedules are
also available at the SEC's public reference rooms or through its EDGAR database
on the Internet.
You should rely only on the information contained or incorporated by
reference in this prospectus. Isonics has not authorized anyone to provide you
with information that is different from what is contained in this prospectus.
You should not assume that the information contained in this prospectus is
accurate as of any date other than the date set forth on the front cover of this
prospectus.
61
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Financial Statements for the Years Ended April
30, 1998 and 1999
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statement of Stockholders' Equity............ F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
Condensed Consolidated Financial Statements for the Nine
Months Ended January 31, 1999 and 2000
Condensed Consolidated Balance Sheets..................... F-21
Condensed Consolidated Statements of Operations........... F-23
Condensed Consolidated Statements of Cash Flows........... F-24
Notes to Condensed Consolidated Financial Statements...... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Isonics Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Isonics
Corporation and Subsidiaries as of April 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Isonics
Corporation and Subsidiaries as of April 30, 1999 and 1998, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Grant Thornton LLP
San Jose, California
July 23, 1999, except for Note 13 as to which the date is July 29, 1999
F-2
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,044 $ 452
Accounts receivable (net of allowances of $130 and $82,
respectively)........................................... 1,629 932
Inventories............................................... 456 651
Prepaid expenses.......................................... 45 160
Deferred income taxes..................................... 112 --
------- -------
Total current assets.................................. 3,286 2,195
PROPERTY AND EQUIPMENT, net................................. 1,626 1,018
GOODWILL, net............................................... 236 3,388
NOTES RECEIVABLE FROM SHAREHOLDERS.......................... 170 130
OTHER ASSETS................................................ 22 75
DEFERRED INCOME TAXES....................................... 315 --
------- -------
TOTAL....................................................... $ 5,655 $ 6,806
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and line of credit...... $ 80 $ 1,136
Notes payable to related parties.......................... -- 922
Accounts payable.......................................... 657 1,368
Accrued liabilities....................................... 738 1,086
------- -------
Total current liabilities............................. 1,475 4,512
LONG-TERM DEBT.............................................. 312 --
DEFERRED INCOME TAXES....................................... 427 --
COMMITMENTS................................................. -- --
STOCKHOLDERS' EQUITY:
Common stock--no par value; 20,000,000 shares authorized;
issued and outstanding: 1998--5,714,250;
1999--6,607,760......................................... 5,289 6,795
Notes receivable from shareholders........................ (337) (469)
Accumulated deficit....................................... (1,511) (4,032)
------- -------
Total stockholders' equity............................ 3,441 2,294
------- -------
TOTAL....................................................... $ 5,655 $ 6,806
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Net revenues................................................ $6,783 $16,998
Cost of revenues............................................ 4,662 13,375
------ -------
Gross margin............................................ 2,121 3,623
Operating expenses:
Selling, general and administrative....................... 1,342 3,643
Research and development.................................. 811 1,155
Restructuring and office closure.......................... -- 691
------ -------
Total operating expenses................................ 2,153 5,489
------ -------
Operating loss.............................................. (32) (1,866)
Other income (expense)
Interest income........................................... 74 36
Interest expense.......................................... (219) (575)
Foreign currency gain..................................... -- 55
------ -------
Total other expense, net................................ (145) (484)
------ -------
Loss before extraordinary item and taxes.................... (177) (2,350)
Income tax expense (benefit)................................ (314) 171
------ -------
Income (loss) before extraordinary item..................... 137 (2,521)
Extraordinary item--loss on extinguishment of debt.......... (252) --
------ -------
NET LOSS.................................................... $ (115) $(2,521)
====== =======
NET INCOME (LOSS) PER SHARE--BASIC
Net income (loss) per share before extraordinary item..... $ 0.03 $ (0.41)
Extraordinary item........................................ $(0.05) $ --
Net loss per share........................................ $(0.02) $ (0.41)
Shares used in computing per share information............ 5,039 6,210
NET INCOME (LOSS) PER SHARE--DILUTED
Net income (loss) per share before extraordinary item..... $ 0.02 $ (0.41)
Extraordinary item........................................ $(0.04) $ --
Net loss per share........................................ $(0.02) $ (0.41)
Shares used in computing per share information............ 6,469 6,210
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE
-------------------- FROM (ACCUMULATED
SHARES AMOUNT SHAREHOLDERS DEFICIT) TOTAL
--------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
BALANCES, May 1, 1997................... 4,550,268 $1,129 $ (343) $ (1,396) $ (610)
Issuance of common stock (net of
issuance costs of $1,327)........... 810,000 3,452 -- -- 3,452
Interest on notes receivable from
stockholders........................ -- -- (22) -- (22)
Repayment of interest from
stockholders........................ -- -- 28 -- 28
Issuance of common stock in connection
with Interpro acquisition........... 353,982 708 -- -- 708
Net loss.............................. -- -- -- (115) (115)
--------- ------ ------ -------- --------
BALANCES, April 30, 1998................ 5,714,250 5,289 (337) (1,511) 3,441
Issuance of common stock in connection
with Chemotrade acquisition......... 357,730 894 -- -- 894
Issuance of common stock in lieu of
salaries............................ 118,182 130 -- -- 130
Conversion of debt into common
stock............................... 127,209 191 -- -- 191
Exercise of stock options and
warrants............................ 290,389 147 (130) -- 17
Fair value of warrants issued with
debt................................ -- 144 -- -- 144
Interest on notes receivable from
stockholders........................ -- -- (24) -- (24)
Repayment of interest from
stockholders........................ -- -- 22 -- 22
Net loss.............................. -- -- -- (2,521) (2,521)
--------- ------ ------ -------- --------
BALANCES, April 30, 1999................ 6,607,760 $6,795 $ (469) $ (4,032) $ 2,294
========= ====== ====== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (115) $(2,521)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 200 520
Interest on notes receivable from shareholders.......... (22) (24)
Fair value of warrants issued with debt................. -- 144
Interest recognized upon conversion of debt to equity... -- 64
Deferred income taxes................................... (315) --
Loss on disposal of property and equipment.............. -- 504
Issuance of common stock in lieu of salaries............ -- 130
Extraordinary item--loss on extinguishment of debt...... 252 --
Changes in operating assets and liabilities:
Accounts and notes receivable......................... (1,232) 1,748
Inventories........................................... 1,083 (89)
Prepaid expenses...................................... 5 98
Other assets.......................................... 5 (30)
Accounts payable...................................... (283) (112)
Accrued liabilities and other......................... (117) (75)
------- -------
Net cash provided by (used in) operating
activities........................................ (539) 357
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (72) (159)
Cash acquired in purchase of Interpro..................... 6 --
Purchase of Chemotrade, net of cash acquired.............. -- (546)
------- -------
Net cash used in investing activities............... (66) (705)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from line of credit........................ -- 16
Proceeds from issuance of debt............................ -- 701
Repayment of notes receivable from shareholders........... 28 22
Payments of debt.......................................... (1,852) (1,000)
Proceeds from issuance of common stock.................... 3,452 17
Payment of debt issuance costs............................ (7) --
------- -------
Net cash provided by (used in) financing
activities........................................ 1,621 (244)
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS..... 1,016 (592)
Cash and cash equivalents at beginning of period............ 28 1,044
------- -------
Cash and cash equivalents at end of period.................. $ 1,044 $ 452
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Isonics Corporation, (the "Company") develops and markets products worldwide
based on enriched stable isotopes for applications in the energy, medical
research, diagnostic, pharmaceutical and semiconductor industries. Through one
of the Company's subsidiaries, it also provides contract research and
development services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, International Process Research Corporation
("Interpro"), acquired April 30, 1998, and Chemotrade GmbH ("Chemotrade"),
acquired June 1, 1998. The consolidated balance sheet at April 30, 1998 includes
the assets and liabilities of Isonics Corporation and Interpro. The consolidated
statement of operations for the fiscal year ended April 30, 1998, includes the
results of Isonics Corporation and does not include the operations of Interpro
as the acquisition occurred on the last day of fiscal 1998. The consolidated
balance sheet at April 30, 1999, includes the assets and liabilities of Isonics
Corporation, Interpro and Chemotrade. The consolidated statement of operations
for the fiscal year ended April 30, 1999, includes the results of Isonics and
Interpro for the year then ended and the results of Chemotrade for the eleven
months then ended. All significant intercompany accounts have been eliminated in
consolidation. A pro forma income statement for the year ended April 30, 1999,
has not been presented as the pro forma results of operations for the year would
not have been materially different from the results reported.
CASH EQUIVALENTS
Cash equivalents include investments purchased with a maturity of less than
ninety days. Cash balances held in foreign bank accounts were $405,000 at April
30, 1999.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and trade accounts
receivable. Cash equivalents are maintained with high quality institutions and
are regularly monitored by management. The Company extends credit to its
customers, most of whom are large, established companies. Credit risk is
mitigated by performing ongoing credit evaluations of its customers' financial
condition and generally does not require collateral.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over five to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the lease term.
F-7
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill resulted from the acquisitions of Isoserve, Inc. and Chemotrade,
and is being amortized on a straight-line basis over six years and twenty years,
respectively. The Company evaluates the realizability of goodwill to determine
potential impairment by comparing the undiscounted future cash flows of the
related assets. The Company modifies or adjusts goodwill if an impairment is
indicated. Based upon its most recent evaluation, the Company believes that no
impairment of goodwill exists as of April 30, 1999.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
for financial accounting and reporting purposes. A valuation allowance is
provided when deferred tax assets are not expected to be realized.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Product returns and
warranty costs have not been material in any period. Revenue from research
contracts is recognized ratably as services are performed and costs are
incurred.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as revenues and expenses during the reporting period. Actual results could
differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of cash and equivalents, trade receivables and trade payables
approximates carrying value due to the short maturity of such instruments. The
fair value of debt with third-party financial institutions is not determinable
due to the default status of the debt. The fair value of debt with related
parties and promissory notes is not determinable due to the terms of the debt
and no comparable market for such debt.
TRANSLATION OF FOREIGN CURRENCIES
The Company conducts substantially all of its transactions in U.S. dollars,
except for transactions by its foreign subsidiary. The financial statements of
the Company's foreign subsidiary are denominated in the country's local currency
and remeasured for purposes of consolidation, with the U.S. dollar as the
functional currency. Gains and losses from remeasurement and transaction gains
and losses are included in the statement of operations.
F-8
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company provides additional pro
forma disclosures as required under Statement of Financial Accounting Standards
("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, effective May 1, 1998. SFAS No. 131
establishes new rules for presenting reportable business segments. The adoption
had no effect on the Company's net loss or stockholders' equity.
NET INCOME (LOSS) PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive securities
outstanding during the period. Dilutive securities consist of options and
warrants. Approximately 3,439,000 options and warrants were excluded from the
loss per share calculation in 1999 as the inclusion would be antidilutive.
The following table reconciles the denominator used in the per share
computation (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Basic shares outstanding.................................... 5,039 6,210
Stock options and warrants.................................. 1,430 --
----- -----
Diluted shares outstanding.............................. 6,469 6,210
===== =====
</TABLE>
NOTE 2--FINANCIAL STATEMENT COMPONENTS
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Finished goods.............................................. $250 $420
Raw Materials............................................... 206 231
---- ----
$456 $651
==== ====
</TABLE>
F-9
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL STATEMENT COMPONENTS (CONTINUED)
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Office furniture and equipment.............................. $ 118 $ 159
Production equipment........................................ 1,549 1,094
Leasehold Improvements...................................... 4 19
------ ------
1,671 1,272
Accumulated depreciation and amortization................... (45) (254)
------ ------
$1,626 $1,018
====== ======
</TABLE>
Goodwill related to acquisitions consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Isoserve, net of accumulated amortization of $236 and
$315...................................................... $ 236 $ 157
Chemotrade, net of accumulated amortization of $0 and
$155...................................................... -- 3,231
------ ------
$ 236 $3,388
====== ======
</TABLE>
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Compensation................................................ $419 $ 391
Accrued interest............................................ 12 68
Customer advances and deposits.............................. 76 97
Other....................................................... 231 530
---- ------
$738 $1,086
==== ======
</TABLE>
F-10
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL STATEMENT COMPONENTS (CONTINUED)
Supplemental disclosure of non-cash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Stock issued for note receivable........................... $ -- $ 130
====== =======
Conversion of trade payables into debt..................... $ -- $ 95
====== =======
Forgiveness of note receivable from shareholder............ $ 33 $ --
====== =======
Purchase of subsidiary
Cash paid, net of cash acquired.......................... $ -- $ 546
Stock issued to seller................................... 708 894
Debt issued to seller.................................... -- 1,750
Liabilities assumed...................................... 1,464 1,598
Goodwill................................................. -- (3,385)
------ -------
Assets acquired.......................................... $2,172 $ 1,403
====== =======
</TABLE>
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest.................................................. $177 $475
Income taxes.............................................. 1 227
</TABLE>
F-11
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets
Accruals and expenses deductible in future periods........ $ 297 $ 1,269
Net operating loss carryforwards.......................... 211 435
----- -------
Total deferred tax assets............................. 508 1,704
Valuation allowance....................................... (81) (1,178)
----- -------
427 526
Deferred tax liabilities
Amortization and depreciation............................. (427) (526)
----- -------
$ -- $ --
===== =======
</TABLE>
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Current
Federal................................................... $ -- $ --
State..................................................... 1 --
Foreign................................................... -- 171
----- ----
1 171
Deferred
Federal................................................... (230) --
State..................................................... (85) --
----- ----
(315) --
----- ----
$(314) $171
===== ====
</TABLE>
The primary differences between the statutory federal tax rate and the
effective rate in 1999 are the taxable earnings of the Company's foreign
subsidiary, the non-deductibility of certain expenses associated with warrants
and commons shares issued with debt and upon debt conversion and the valuation
allowance provided against deferred tax assets. In 1998, the primary differences
resulted from the non-deductibility of certain expenses associated with the
extinguishment of debt and the valuation allowance provided against the deferred
tax assets. The change in the valuation allowance for deferred tax assets for
the years ended April 30, 1998 and 1999 was $81,000 and $1,097,000,
respectively. The Company provided a valuation allowance for its deferred tax
asset to the extent it believes realization of such asset is uncertain.
The Company has $1,086,000 of net operating loss carryforwards for federal
purposes and associated state net operating loss carryforwards, which expire at
various dates through 2019. Current federal and state tax law includes certain
provisions limiting the annual use of net operating loss
F-12
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
carryforwards in the event of certain defined changes in stock ownership. The
annual use of the Company's net operating loss carryforwards could be limited
according to these provisions.
NOTE 4--DEBT AND LINE OF CREDIT
Debt and line of credit consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Bank term loan--guaranteed by the SBA, repaid in 1999....... $ 40 $ --
Bank term loan, repaid in 1999.............................. 306 --
Revolving line of credit.................................... -- 514
Notes payable to related parties............................ -- 922
10% Subordinated promissory note............................ -- 92
Unsecured promissory notes.................................. -- 494
Other....................................................... 46 36
---- ------
392 2,058
Less current maturities..................................... 80 2,058
---- ------
Long-term debt........................................ $312 $ --
==== ======
</TABLE>
The revolving line of credit with Coast Business Credit ("Coast"), the
Company's primary lender, is secured by substantially all of the assets of the
Company. Interest is at prime (7.75% at April 30, 1999) plus 4%. The loan
consists of the following:
- $500,000 equipment term loan, payable over forty eight equal monthly
installments of principal and interest;
- $250,000 term loan, with interest only payments due monthly and principal
due October 31, 1998;
- $500,000 revolving line of credit, borrowings are limited to 35% of
eligible inventory;
- $1,250,000 revolving line of credit, borrowings are limited to 80% of
eligible accounts receivable; and
- $500,000 equipment acquisition term loan, borrowings are limited to 80% of
invoice cost of equipment, payable over thirty-six monthly installments of
principal and interest. The availability of the loan is conditioned upon
the Company achieving and maintaining minimum debt service coverage
ratios.
In April 1999, Coast sent notification that Isonics was in default of the
terms of the loan agreements. As a result, Coast placed substantial restrictions
on the availability of funds and established revised repayment terms. Because of
this default, the entire outstanding balance has been classified as current.
Borrowings under the loan are presently limited to eligible receivables and
inventory amounts.
Notes payable to related parties consist of an $812,000 (DM1,500,000) note
payable to the sellers of Chemotrade and other unsecured notes to officers and
directors amounting to $110,000. The Chemotrade note is secured by the shares of
Chemotrade, bears interest at 10% and was due in June
F-13
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DEBT AND LINE OF CREDIT (CONTINUED)
1999. The Company paid $550,000 towards the Chemotrade note principal in July
1999 and extended the due date of the balance to July 31, 1999. In consideration
for the extension, the Company will grant one $3 warrant for each $5 of deferred
payment. The unsecured notes to officers and directors bear interest at 5% per
month and are payable upon demand.
Unsecured promissory notes consist of two notes bearing interest at prime
plus 4% for $200,000 each to a vendor and a $94,500 note to a different vendor.
The $200,000 notes were due in April 1999. The Company issued 75,000 warrants to
the vendor in connection with the $200,000 notes. The fair value of these
warrants, $144,000, was recorded as additional interest expense for the period.
The $94,500 note represents the conversion of certain trade payables into a
non-interest bearing note due in seven equal monthly installments beginning in
June 1999.
NOTE 5--COMMITMENTS
The Company rents office, production facilities and equipment under
operating leases expiring through July 2003. Rent expense for operating leases
was approximately $39,000 and $202,000 for the years ended April 30, 1998 and
1999, respectively. Future minimum annual operating lease commitments are as
follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $197,000
2001........................................................ 161,000
2002........................................................ 44,000
2003........................................................ 18,000
2004........................................................ 9,000
--------
$429,000
========
</TABLE>
The Company is required to make royalty payments to Isoserve, Inc. for
depleted zinc metal sold through fiscal 2000. The maximum royalty payments under
the agreement are $1,000,000. The Company paid royalties of $192,000 and
$110,000 for the years ended April 30, 1998 and 1999, respectively, and has paid
$633,000 of royalties since inception through April 30, 1999. At April 30, 1999,
the company had accrued royalties payable under this agreement amounting to
$88,000.
NOTE 6--STOCKHOLDERS' EQUITY
On August 11, 1997, the Board of Directors approved a 3 for 1 stock split of
its common shares. All per share amounts, number of shares, stock options and
warrant data have been restated to reflect the stock split.
COMMON STOCK
On September 22, 1997, the Company completed an initial public offering of
810,000 units, each unit consisting of one share of common stock and one
redeemable common stock purchase warrant. Each warrant entitles the holder to
purchase one share of common stock at $5.80 per share, commencing September 22,
1998. The Company may redeem the warrants commencing March 21, 1999 at a price
of $.10 per warrant if the closing price of the common stock is at lease $14.50
per share for at lease 20 consecutive trading days.
F-14
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the offering, the Company granted the underwriter
warrants to purchase up to 160,000 shares of common stock at a weighted average
exercise price of $7.77. The warrants are exercisable for a four year period
commencing September 22, 1998.
The Company has reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
APRIL 30,
1999
---------
<S> <C>
Exercise of stock options................................... 1,208,356
Exercise of warrants........................................ 2,442,475
Employee stock purchase plan................................ 200,000
---------
3,850,831
=========
</TABLE>
STOCK OPTION PLAN
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan authorized the grant of 1,727,832
incentive and nonqualified stock options to key employees, directors or
consultants of the Company. Incentive stock options are granted at a price not
less than fair market value, and nonqualified stock options are granted at a
price not less than 85% of the fair market value, as determined by the Board of
Directors. Options generally become exercisable upon issuance under the 1996
Stock Option Plan and are subject to redemption rights typically over three
years and generally expire ten years after the date of grant. In September 1997,
the Board of Directors terminated the Company's 1996 Stock Option Plan.
EXECUTIVE AND INCENTIVE STOCK OPTION PLANS
In November 1996, the Board of Directors adopted the Executive and Incentive
Stock Options Plans authorizing the granting of up to 570,000 and 150,000
incentive and nonqualified stock options to key employees, directors or
consultants of the Company, respectively. Incentive stock options are granted at
a price not less than fair market value, and nonqualified stock options are
granted at a price not less than 85% of the fair market value. Options are
exercisable when vested, typically over five years and expire ten years after
the date of grant.
The exercise price of the options generally approximates the fair market
value per share of the Company's stock on the date of grant. Accordingly, no
compensation cost has been recognized for grants made from the plans. Had
compensation cost for the plans been determined based on the fair value of the
options at the grant dates consistent with SFAS No. 123, ACCOUNTING FOR
STOCK-BASED
F-15
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
COMPENSATION, the Company's net loss and net loss per share for the years ended
April 30, 1998 and 1999 would have been changed to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Net loss
As reported........................................ $(115,000) $(2,521,000)
Pro forma.......................................... (379,000) (3,174,000)
Loss per share (diluted)
As reported........................................ $ (0.02) $ (0.41)
Pro forma.......................................... (0.06) (0.51)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions; no expected dividends, volatility of 150%; risk-free interest rate
of 6.0%; and expected lives of 5 years. A summary of the status of the Company's
stock option plans as of April 30, 1998 and 1999, and changes during the years
ending on these dates is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding, May 1, 1997.................................... 684,809 $0.72
Granted................................................... 382,500 $3.82
Exercised................................................. -- --
Canceled.................................................. (12,500) $2.60
----------
Outstanding, April 30, 1998................................. 1,054,809 $1.84
Granted................................................... 480,721 $1.71
Exercised................................................. (195,830) $0.66
Canceled.................................................. (343,123) $3.35
----------
Outstanding, April 30, 1999................................. 996,577 $1.49
==========
</TABLE>
The weighted average fair value of options granted during the years ended
April 30, 1998 and 1999 was $3.25 and $1.56, respectively.
The following information applies to options outstanding at April 30, 1999:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES $0.58 $1.00-$1.44 $1.62-$2.38 $2.56-$3.50
- ------------------------ -------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Options outstanding........................ 336,927 255,721 223,929 180,000
Weighted average exercise price............ $ 0.58 $ 1.25 $ 1.95 $ 2.98
Weighted average remaining contractual life
(years).................................. 7 10 9 9
Options exercisable........................ 336,927 144,721 59,072 105,000
Weighted average exercise price............ $ 0.58 $ 1.36 $ 1.89 $ 3.28
</TABLE>
F-16
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
In fiscal 1997, two executive officers of the Company exercised stock
options to each acquire 259,175 shares of common stock at an exercise price of
$0.64 per share. In fiscal 1999, two other executive officers exercised stock
options to acquire 57,603 and 138,227 shares of common stock at exercise prices
of $0.87 and $0.58, respectively. In each case, the Company loaned the executive
officer the aggregate amount representing the exercise price of the option, and
the officer executed a promissory note reflecting the loan. Each executive
officer pledged the purchased shares as collateral for the loan pursuant to a
pledge agreement. Each loan bears interest at an annual rate equal to the
minimum applicable federal rate, and interest is payable annually; principal and
accrued but unpaid interest is due five years from the date of the note. Until
each note has been paid in full and upon any sale of such option shares by the
respective executive, a portion of the sales proceeds will be used to pay
amounts owed under the note. In addition, during fiscal 1998, the Company loaned
to each of the two executive officers related to the fiscal 1997 option
exercises, pursuant to a five-year note with interest at the minimum applicable
federal rate, the amount equal to the federal and state tax liability incurred
by him as a result of exercising such option, and to pay compensation to such
officer equal to the amount of interest payable under these loans and the amount
of taxes payable as a result of such compensation. At April 30, 1998, principal
and interest due on the loans to acquire the common stock totaled $330,000 and
$7,000, respectively. At April 30, 1999, principal and interest due on the loans
to acquire the common stock totaled $460,000 and $9,000, respectively. At April
30, 1998, principal and interest on the loans to pay the federal and state tax
liability incurred as a result of exercising such option totaled $123,000 and
$3,000, respectively. At April 30, 1999, principal and interest on the loans to
pay the federal and state tax liability incurred as a result of exercising such
option totaled $126,000 and $4,000, respectively. During fiscal 1998, the
executives received compensation of $38,000 to repay interest payable to the
Company on the common stock and tax notes.
EMPLOYEE STOCK PURCHASE PLAN
The Company had in effect an employee stock purchase plan under which
200,000 shares of the Company's common stock were reserved for issuance to all
permanent employees who have met minimum employment criteria. Employees who do
not own 5% or more of the outstanding shares are eligible to participate through
payroll deductions. At the end of each offering period, shares are purchased by
the participants at 85% of the lower of the fair market value at the beginning
or the end of the offering period. No stock has been issued under the plan as of
April 30, 1999.
NOTE 7--EXTRAORDINARY ITEM
The terms of the Company's non-convertible promissory notes stated that in
the event of an initial public offering of the Company's stock, all principal
and interest would be due within five days of the closing of such initial public
offering. Accordingly, the Company repaid the notes and interest in fiscal 1998.
At the time of repayment, unamortized debt issuance costs and discounts totaling
$252,000 were charged to earnings as an extraordinary item.
NOTE 8--EMPLOYEE BENEFIT PLAN
The Company has established a profit sharing plan under section 401(k) of
the Internal Revenue Code. The plan is a defined contribution plan, covering
substantially all employees of the Company. Company contributions to the plan
aggregated approximately $3,000 and $30,000 for 1998 and 1999.
F-17
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CONCENTRATIONS
Four separate customers accounted for 10% or more of net revenues in fiscal
1998: 47%, 18%, 12% and 11%. Two separate customers accounted for 10% or more of
net revenues in fiscal 1999: 23% and 13%.
Sales by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
United States............................................... $6,354 $8,072
Europe...................................................... 331 8,348
Other....................................................... 98 578
</TABLE>
NOTE 10--BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company has two operating segments: Stable Isotope Production and
Contract Research and Development Services. The Company's reportable segments
are strategic business units that offer different products and services. They
are managed based on the fundamental differences in their operations.
Information by segment is set forth below (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net revenues
Stable Isotope Production................................ $6,783 $14,384
Contract Research and Development Services............... -- 2,614
Operating income (loss)
Stable Isotope Production................................ $ (32) $(1,035)
Contract Research and Development Services............... -- (831)
Identifiable assets
Stable Isotope Production................................ $4,189 $ 5,713
Contract Research and Development Services............... 1,466 1,093
Depreciation and amortization
Stable Isotope Production................................ $ 200 $ 263
Contract Research and Development Services............... -- 257
Net capital expenditures
Stable Isotope Production................................ $ 72 $ 88
Contract Research and Development Services............... -- 71
</TABLE>
F-18
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
A summary of the Company's operations by geographic area is presented below
(in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net revenues
United States........................................... $6,783 $ 6,817
Germany................................................. -- 10,181
Operating income (loss)
United States........................................... $ (32) $ (2,322)
Germany................................................. -- 456
Identifiable assets
United States........................................... $5,655 $ 5,507
Germany................................................. -- 1,299
</TABLE>
NOTE 11--RESTRUCTURING
In October 1998, the Company recorded a charge to operations amounting to
$708,000 relating to a planned restructuring of the Company's operations. This
charge consisted primarily of lease termination costs, employee severance pay
and the write down of fixed assets. As of April 30, 1999, the company had
implemented nearly all of the changes in the operations and expected to incur
approximately $65,000 of additional costs to be expensed in the year ending
April 30, 2000. The Company reduced the accrual for restructuring costs by
$17,000 in the quarter ended April 30, 1999, to reflect the actual costs
incurred. A liability amounting to $61,000 remains as a recorded liability at
April 30, 1999 relating to the lease termination costs.
NOTE 12--ACQUISITIONS
On April 30, 1998, the Company acquired all of the outstanding common stock
of Interpro. The purchase price was paid in 353,982 shares of the Company's
common stock with a fair market value of $708,000. Transaction costs were
$70,000 and no goodwill was recognized upon completing the transaction. The
results of operations for Interpro are included from May 1, 1998, as the
acquisition occurred on the last day of the fiscal year ended April 30, 1998.
On July 21, 1998, the Company acquired all of the outstanding shares of
Chemotrade GmbH and subsidiary (collectively "Chemotrade"), which was owned by
two shareholders. Chemotrade is engaged in the distribution, development and
manufacturing of stable and radioisotopes. The purchase price has been accounted
for effective June 1, 1998, the date control was transferred. The purchase price
was denominated in German Deutsche Marks, and all amounts reported below are
translated at the historical conversion rate unless otherwise noted. The
purchase price consideration on June 1, 1998 consisted of $2.576 million paid at
closing and $1.07 million to be paid through June 2001. Transaction costs were
$125,000. Imputed interest from the effective date of the acquisition, June 1,
1998, totaled $28,000.
The consideration paid upon closing consisted of cash of $758,000, 357,730
restricted shares of common stock with a fair market value of $894,000, and two
notes. The first note of $924,000 (DM1,663,000) bore interest at 2% per month
and was paid in August 1998, and the second note of $812,000 (DM1,500,000) bears
interest at 10%, due on June 1, 1999.
F-19
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--ACQUISITIONS (CONTINUED)
The purchase agreement provides for the selling shareholders to receive
additional consideration in the event certain levels of pretax earnings are
achieved in the periods ending through April 30, 2001. The agreement also
contains a provision to reduce the consideration given if the pretax earnings
are not achieved for each of the years ended April 30, 2000 and 2001. The
maximum additional consideration that can be earned is $271,000 (DM500,000). Any
additional consideration will be recorded as additional goodwill.
Pro forma results of operations as if the acquisitions of Interpro and
Chemotrade had occurred at the beginning of fiscal 1998, combining the audited
results of operations of Isonics for the year ended April 30, 1998 with the
results of operations of Interpro and Chemotrade for the years ended April 29,
1998 and May 31, 1998, respectively, are as follows (in thousands):
<TABLE>
<S> <C>
Net revenues................................................ $16,990
Gross margin................................................ 3,998
Net loss.................................................... (174)
Net loss per share.......................................... (.03)
Number of shares used in computing per share information.... 5,751
</TABLE>
NOTE 13--SUBSEQUENT EVENTS
On July 29, 1999, the Company completed a private placement financing to
accredited investors and certain creditors valued in total at $2.7 million. The
Company issued 1,830,000 units, each consisting of one share of Series A
Convertible Preferred Stock and one warrant. The Company received $2,250,000
cash proceeds and converted $425,000 of long-term debt in connection with the
private placement. Each share of the Series A Convertible Preferred Stock is
convertible into one share of the Company's common stock at a conversion price
of $1.50. The liquidation preference for the Series A Convertible Preferred
Stock is $1.50. Each warrant allows the investor to purchase one share of the
Company's common stock for $3.75 through July 29, 2002.
In addition to converting $425,000 of existing debt into equity as part of
the private placement, the Company:
- issued 500,000 warrants to purchase shares of the Company's common stock
to an investment banker as a commission on this placement. The warrants
are exercisable at $3.75 per share through July 29, 2002.
- issued 46,667 units in satisfaction of all currents and future obligations
under the Isoserve royalty agreement.
- extended the payment due date for the remaining balance on the Chemotrade
acquisition note to July 2000 and extended the payment due date for
certain unsecured promissory notes to January, 2000.
Management believes that the proceeds and the revised debt structure
resulting from the private placement and additional strategies developed by
management will be sufficient to fund operations for the next twelve months.
F-20
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------
(UNAUDITED)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,576
Accounts receivable (Net of allowance of $82)............. 1,915
Inventories............................................... 233
Prepaid expenses and other current assets................. 72
-------
Total current assets.................................... $ 6,796
-------
LONG-TERM ASSETS:
Property and equipment, net............................... 784
Goodwill, net............................................. 3,104
Notes receivable from shareholders........................ 0
Other assets.............................................. 32
-------
Total long-term assets.................................. $ 3,920
-------
TOTAL ASSETS................................................ $10,716
=======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-21
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------
(UNAUDITED)
<S> <C>
CURRENT LIABILITIES:
Notes payable and line of credit.......................... $ 24
Notes payable to related parties.......................... 0
Accounts payable.......................................... 1,364
Accrued liabilities....................................... 1,341
-------
Total current liabilities............................... $ 2,729
-------
SHAREHOLDERS' EQUITY:
Class A Preferred Stock--no par value. 10,000,000 shares
authorized; 1,830,000 shares outstanding................ 2,745
Common stock--no par value. 20,000,000 shares authorized;
6,663,017 shares issued and outstanding on January 31,
2000.................................................... 6,765
Notes receivable from shareholders........................ (210)
Accumulated deficit....................................... (1,313)
-------
Total shareholders' equity.............................. $ 7,987
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $10,716
=======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-22
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
----------------------
1999 2000
-------- --------
<S> <C> <C>
Net revenues................................................ $14,309 $11,115
Cost of revenues............................................ 11,575 8,792
------- -------
Gross margin............................................ 2,734 2,323
Operating expenses:
Selling, general and administrative....................... 2,444 3,117
Research and development.................................. 962 919
Restructuring and office closure.......................... 708 60
------- -------
Total operating expenses................................ 4,114 4,096
------- -------
Operating (loss)............................................ (1,380) (1,773)
------- -------
Other income (expense):
Foreign exchange.......................................... 35 (64)
Interest income........................................... 21 55
Gain on sale of product line.............................. -- 5,296
Interest expense.......................................... (236) (325)
------- -------
Total other income (expense), net....................... (180) 4,962
------- -------
Income (loss) before income taxes........................... (1,560) 3,189
Income tax expense.......................................... 197 471
------- -------
NET INCOME (LOSS)........................................... $(1,757) $ 2,718
======= =======
NET INCOME (LOSS) PER SHARE--BASIC
Net income (loss) per share................................. $ (0.29) $ 0.41
Shares used in computing per share information.............. 6,120 6,610
NET INCOME (LOSS) PER SHARE--DILUTED
Net income (loss) per share................................. $ (0.29) $ 0.31
Shares used in computing per share information.............. 6,120 8,906
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-23
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Net cash (used in) provided by operating activities......... $ 146 $(2,904)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Chemotrade, net of cash acquired.............. (546) --
Sale of depleted zinc business............................ -- 6,730
Purchases of property and equipment....................... (120) (20)
------- -------
Cash provided by (used in) investing activities......... $ (666) $ 6,710
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit.............................. 931 (513)
Proceeds from issuance of notes payable................... 500 75
Repayments of notes payable............................... (1,714) (1,494)
Proceeds from issuance of common stock.................... 17 --
Proceeds from issuance of Class A Preferred Stock......... -- 2,250
Payments of debt issuance costs........................... (30) --
------- -------
Cash provided by (used in) financing activities......... $ (296) $ 318
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:....... (816) 4,124
Cash and cash equivalents at beginning of period.......... 1,044 452
------- -------
Cash and cash equivalents at end of period................ $ 228 $ 4,576
======= =======
Supplemental disclosure of cash flow information: Cash paid
during the period for:
Interest................................................ $ 149 $ 252
======= =======
Income taxes............................................ $ 242 $ 53
======= =======
Supplemental disclosure of noncash investing and financing
activities:
Accounts payable converted into notes payable........... $ -- $ 243
Liabilities converted into Class A Preferred Stock...... -- 495
Equipment acquired under capital lease.................. 14 --
Issuance of warrants in conjunction with notes
payable............................................... -- 245
Retirement of Common Stock by shareholders to pay off
subscriptions......................................... -- 275
======= =======
Purchase of Chemotrade:
Cash paid, net of cash acquired....................... $ 546
Stock issued to sellers............................... 894
Notes payable issued to sellers....................... 1,750
Liabilities assumed................................... 1,598
-------
Assets acquired (including goodwill of $3,385)...... $ 4,788
=======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-24
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Isonics
Corporation and Subsidiaries (the "Company" or "Isonics") as of January 31,
2000, and for the nine months ended January 31, 2000, and 1999, have been
prepared on the same basis as the annual audited financial statements. In the
opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of this interim information. Operating results and cash flows for interim
periods are not necessarily indicative of results for the entire year.
NET INCOME (LOSS) PER SHARE
A total of approximately 1,513,000 and 3,400,000 outstanding stock options
and warrants have been excluded from the diluted earnings per share calculation
for the nine month ended January 31, 2000 and 1999, respectively, as the
inclusion would be anti-dilutive. An additional 4,000,000 warrants were excluded
from the calculation for the nine month ended January 31, 2000 as the issuance
of the underlying shares is contingent upon the delivery of silicon-28 per the
terms of the Eagle-Picher Transaction.
RECONCILIATION OF EARNINGS PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
-------------------
2000 1999
Numerator -------- --------
<S> <C> <C>
Net income (loss)......................................... 2,718 (1,757)
Preferred stock dividends................................. -- --
------ --------
Net income (loss) used in computing basic income (loss)
per common share........................................ $2,718 $ (1,757)
Preferred stock dividends................................. -- --
------ --------
Net income (loss) used in computing diluted income (loss)
per common share........................................ 2,718 (1,757)
====== ========
Denominator
Weighted average common shares outstanding during the
period.................................................. 6,610 6,120
Dilutive effect of conversion of preferred stock.......... 1,220 --
Dilutive effect of options and warrants using the treasury
stock method............................................ 1,076 --
------ --------
Shares used in computing diluted income (loss) per common
share................................................... 8,906 6,120
====== ========
</TABLE>
F-25
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------
<S> <C>
Finished goods.............................................. $138
Work in progress............................................ 95
Raw materials............................................... --
----
Total inventories......................................... $233
====
</TABLE>
NOTES PAYABLE--RELATED PARTIES
Two notes were issued to each of the sellers of Chemotrade GmbH and
subsidiary as consideration for a portion of the purchase price. The first note
was repaid in August 1998. A partial payment of approximately $550 thousand was
paid in June 1999, on the second note. The remaining balance of approximately
$343 thousand including interest, was refinanced and was originally payable July
31, 2000. The new interest rate was 12% per annum. In addition, approximately
70,000 warrants (five-year, $3.00 strike price) were issued in June 1999, in
conjunction with the refinancing. The fair value of these warrants was
determined to be $157 thousand, using the Black-Scholes option pricing model,
and this value has been amortized as additional interest expense. This note, and
all accrued interest, was paid in December 1999, with proceeds made available
from the Eagle-Picher Transaction, described in more detail below in the
paragraph entitled "SALE OF DEPLETED ZINC BUSINESS."
SIGNIFICANT CUSTOMERS
At January 31, 2000, one customer accounted for 33% of total accounts
receivable. The same customer accounted for approximately 18% of net revenues
during the nine months ended January 31, 2000. The same customer accounted for
approximately 17% of net revenues during the nine months ended January 31, 1999.
F-26
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Segment revenues:
Isotope products....................................... $10,098 $11,991
Contract research and development services and other... 1,017 2,318
------- -------
Total.............................................. $11,115 $14,309
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Segment operating (loss) income:
Isotope products....................................... $(1,387) $(1,217)
Contract research and development services and other... (386) (163)
------- -------
Total.............................................. $(1,773) $(1,380)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------
<S> <C>
Identifiable Assets:
Isotope products.......................................... $ 9,750
Contract research and development services and other...... 966
-------
Total................................................. $10,716
</TABLE>
A summary of operations by geographic area is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues:
United States.......................................... $ 3,904 $ 6,964
Germany................................................ 7,211 7,345
------- -------
Total.............................................. $11,115 $14,309
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating (loss) income:
United States.......................................... $(1,982) $(1,107)
Germany................................................ 209 (273)
------- -------
Total.............................................. $(1,773) $(1,380)
</TABLE>
F-27
<PAGE>
ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------
<S> <C>
Identifiable Assets:
United States............................................. $ 8,798
Germany................................................... 1,918
-------
Total................................................. $10,716
</TABLE>
SALE OF DEPLETED ZINC BUSINESS
On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC. ("Eagle-Picher") for approximately $8.2 million, of which
$6.7 million was paid on December 1, 1999. Additionally, we signed a long-term
isotope supply agreement with Eagle-Picher, and Eagle-Picher will supply us in
2000 with 200 kilograms of silicon-28 to be used in research and development
activities. We also gave Eagle-Picher a warrant to obtain 4,000,000 shares of
our common stock. The warrants are contingent upon the delivery of silicon-28 by
Eagle-Picher. As silicon-28 is delivered we will record the value of the silicon
and the warrants proportionately (20,000 warrants per kilogram), at a value of
$25.00 per gram. This is the price we most recently paid for silicon-28 from
another supplier.
The balance of $1.5 million is payable in three annual installments of $500
thousand. These installments are contingent upon the performance of an
unaffiliated supplier of depleted zinc whose contract with us was assigned to
Eagle-Picher. We will recognize the contingent gain on a straight-line basis
over the thirty-six month period, approximately $41,500 per month, as the
supplier performs under the contract. Two months, or approximately $83,000, have
been recognized in the quarter ended January 31, 2000.
We do not anticipate significant revenues from sales of silicon-28 based
products in the fiscal year ended April 30, 2000. We are collaborating with
academia and industry to evaluate the benefits of isotopically pure silicon-28.
We believe that if evaluations demonstrate the commercial feasibility of one or
more products, demand could emerge in certain segments of the semiconductor
market. We can offer no assurance, however, that these evaluations will
demonstrate the commercial feasibility of any products, that we will be able to
commercialize any such products, or that a market will emerge for any such
products.
F-28
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of Isonics include a provision that eliminates
to the fullest extent permitted by law the personal liability of its directors
to Isonics and its shareholders for monetary damages for breach of the
directors' fiduciary duties. This limitation has no effect on a director's
liability
(i) for acts or omissions that involve intentional misconduct or a knowing
and culpable violation of law,
(ii) for acts or omissions that a director believes to be contrary to the
best interests of Isonics or its shareholders or that involved the
absence of good faith on the part of the director,
(iii) for any transaction from which the director derived an improper
personal benefit,
(iv) for acts or omissions that show a reckless disregard for the director's
duty to Isonics or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course
of performing a director's duties, of a risk of serious injury to
Isonics or its shareholders,
(v) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to
Isonics or its shareholders,
(vi) under Section 310 of the California Corporations Code (the "California
Code") concerning contracts or transactions between Isonics and a
director or
(vii) under Section 316 of the California Code concerning directors liability
for improper dividends, loans and guarantees.
The provision does not extend to acts or omissions of a director in his capacity
as an officer. Further, the provision will not affect the availability of
injunctions and other equitable remedies available to Isonics' shareholders for
any violation of a director's fiduciary duty to Isonics or its shareholders.
The Articles of Incorporation further authorize Isonics to indemnify its
agents (as defined in Section 317(a) of the Code which includes directors and
officers) through Bylaw provisions, agreements with agents, votes of
shareholders or disinterested directors or otherwise, to the fullest extent
permissible under California law. Pursuant to this provision, the Bylaws of
Isonics provide for indemnification of directors and officers. The Bylaws also
permit Isonics to enter into indemnity agreements with individual directors,
officers, employees and other agents. Isonics intends to enter into such
agreements with its directors and executive officers effective upon the closing
of this offering. These Agreements, together with the Bylaws and Articles of
Incorporation, may require Isonics, among other things, to indemnify directors
or officers against certain liabilities that may arise by reason of their status
or service as directors (other than liabilities resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain and maintain directors' and officers' insurance if available on
reasonable terms.
In addition to the rights to indemnification provided under California law,
in the Articles of Incorporation and in the Bylaws, the 1996 Stock Option Plan
provides indemnification to members of the Board of Directors, officers, or
employees of Isonics to whom authority to act for the Board in connection with
the Existing Plan is delegated shall be indemnified against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
defense of any proceeding to which he or she is made a party because of any
action allegedly taken or alleged failure to act in connection with the Plan,
and against amounts paid in settlement (if approved by independent legal
counsel), or in satisfaction of any judgment in such proceeding, unless the
director, officer, or employee, as the case
II-1
<PAGE>
may be, is adjudged to have behaved in bad faith, in a grossly negligent manner,
or with intentional misconduct as to duties.
Isonics currently has directors and officers' liability insurance.
At present, there is no pending litigation or proceeding involving a
director, officer or employee of Isonics pursuant to which indemnification is
sought, nor is Isonics aware of any threatened litigation that may result in
claims for indemnification.
Section 317 of the Code and the Bylaws of Isonics make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, Isonics has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- -------- --------------
<S> <C>
Underwriting Agreement..................... 1.01
Registrant's Certificate of
Incorporation.............................. 3.01
Registrant's Bylaws........................ 3.02
Form of Indemnity Agreement................ 10.09
</TABLE>
ITEM 21 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits Pursuant to Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- ------------------------------------------------------------
<C> <S>
1.01* Form of Underwriting Agreement.
3.01* Registrant's Amended and Restated Articles of
Incorporation.(1)
3.02* Registrant's Bylaws.(1)
3.03* Certificate of Determination of Preferences and Rights of
the Series A Preferred Stock. (SEE EXHIBIT 10.18)
4.01* Specimen Common Stock Certificate.(1)
4.02* Form of Representatives' Warrant Agreement.(1)
4.03* Form of Warrant Agreement between the Registrant and
Continental Stock Transfer & Trust Company, Monroe Parker
Securities.(1)
4.04* Specimen Class A Warrant Certificate(1)
4.05+ Form of Warrant Agreement between the Registrant and
Continental Stock Transfer & Trust Company
4.06+ Specimen Class B Warrant Certificate (included as a part of
exhibit 4.05)
4.07+ Specimen Class C Warrant Certificate (included as a part of
exhibit 4.05)
5.01+ Opinion of Arter & Hadden LLP
10.01* Registrant's 1996 Stock Option Plan.(1)(2)
10.02* Form of Employment Agreement between the Registrant and
certain officers of the Registrant.(1)(2)
10.03* Registrant's 1996 Executives Equity Incentive Plan.(1)(2)
10.04* Registrant's 1996 Equity Incentive Plan.(1)(2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- ------------------------------------------------------------
<C> <S>
10.05* Memorandum of Agreement between Electrochemical Plant, AO
Techsnabexport, Co., Ltd. and Registrant.(1)
10.06* Option Agreement between the Registrant and Yale
University.(1)
10.07* Office Lease Agreement between Paulsen Properties and the
Registrant dated as of January 1, 1996, as amended.(1)
10.08* Letter from Yale University to Registrant dated
February 10, 1996.(1)
10.09* Form of Indemnity Agreement entered into by Registrant with
each of its directors and investors.(2)
10.10* Stock Purchase Agreement, dated as of April 30, 1998, among
Isonics Corporation, a California corporation, Metallurgy
International, Inc., a Nevada corporation, and International
Process Research Corporation, a Colorado corporation.(3)
10.10.1* Escrow Agreement, dated as of May 15, 1998, among Isonics
Corporation, a California corporation, Metallurgy
International, Inc., a Nevada corporation, Robert H.
Cuttriss (as Agent), and Colorado Business Bank, as Escrow
Agent.(3)
10.11* Registration Rights Agreement dated as of September 27, 1996
by and between Registrant and certain investors.(1)
10.12* Employment Agreement between the Registrant and James E.
Alexander.(1)(2)
10.13* Employment Agreement between the Registrant and Boris
Rubizhevsky.(1)(2)
10.14* Security Agreement dated March 31, 1995 between Isonics and
Isoserve, Inc.(1)
10.15 Omitted
10.16* February 1997 Agreement between the Registrant,
Electrochemical Plant and AO Techsnabexport, Co., Ltd.(1)
10.17* Letter from Yale University to Registrant dated January 28,
1997.(1)
10.18* Certificate of Determination of Preferences and Rights of
the Series A Preferred Stock.(4)
10.19* Form of Subscription Agreement.(4)
10.20* Form of Warrant.(4)
10.21* Investment Banking Agreement.(4)
10.22* Form of Registration Rights Agreement.(4)
10.23* Asset Purchase Agreement dated December 1, 1999 between the
Registrant and Eagle-Picher Technologies, LLC.(5)
10.24* Registration Rights Agreement dated December 1, 1999 between
the Registrant and Eagle-Picher Technologies, LLC.(5)
10.25* Warrant Agreement dated December 1, 1999 between the
Registrant and Eagle-Picher Technologies, LLC.(5)
10.26* Supply Agreement between the Registrant and Eagle-Picher
Technologies, LLC.(6)
23.10+ Consent of independent accountants.
23.11+ Consent of Arter & Hadden, LLP (see exhibit 5.01)
24.01* Power of Attorney (see signature page).
27.01* Financial Statement Schedule.
</TABLE>
- ------------------------
(1) Incorporated herein by reference to exhibit filed with Isonics' Registration
Statement on Form SB-2 ("Registration Statement") (Commission file
No. 333-13289) in which this exhibit bears the same number except
exhibit 3.01 which was numbered 3.03 in that registration statement.
(2) Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 13(a) of Form 10-KSB.
(3) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
May 15 and filed May 27, 1998, and incorporated herein by reference.
II-3
<PAGE>
(4) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
July 29 and filed August 12, 1999, and incorporated herein by reference.
(5) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated
December 1, 1999 and filed December 10, 1999, and amendment thereto filed
February 10, 2000, and incorporated herein by reference.
(6) Confidential treatment requested.
- ------------------------
* Previously filed.
+ Filed herewith.
ITEM 22 UNDERTAKINGS
The Registrant hereby undertakes the following:
(a) (1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and
(iii) include any additional or changed material information of the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial BONA
FIDE offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) To supplement the prospectus after the end of the subscription period to
include the results of the subscription offer, the transactions by the
underwriters during the subscription period, the amount of unsubscribed
securities that the underwriters will purchase, and the terms of any later
reoffering.
(c) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(d) (1) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed as a new
registration statement for the securities offered therein, and that offering of
the securities at that time shall be deemed to be the initial BONA FIDE offering
of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Golden,
State of Colorado, on May 23, 2000.
<TABLE>
<S> <C> <C>
ISONICS CORPORATION
By: /s/ JAMES E. ALEXANDER
-----------------------------------------
James E. Alexander
PRESIDENT
</TABLE>
In accordance with the requirements of the Securities Act of 1933, the
following persons in their capacities and on the dates stated signed this
registration statement.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
constitutes and appoints James E. Alexander and Boris I. Rubizhevsky, or either
of them, as true and lawful attorneys-in-fact and agents with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement file herewith and any
or all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, the Securities and Exchange Commission granting unto
said attorney-in-fact and agents the full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agents or any of them, or his substitute, may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JAMES E. ALEXANDER President, Chief Executive Officer,
-------------------------------------- Chief Operating Officer, and May 19, 2000
James E. Alexander Director
/s/ BORIS I. RUBIZHEVSKY
-------------------------------------- Director May 19, 2000
Boris I. Rubizhevsky
/s/ LINDSAY A. GARDNER
-------------------------------------- Director May 19, 2000
Lindsay A. Gardner
/s/ RICHARD PARKER
-------------------------------------- Director May 19, 2000
Richard Parker
/s/ LARRY J. WELLS
-------------------------------------- Director May 19, 2000
Larry J. Wells
/s/ BRANTLEY J. HALSTEAD
-------------------------------------- Chief Financial Officer and Principal May 19, 2000
Brantley J. Halstead Accounting Officer
</TABLE>
II-5
<PAGE>
ISONICS CORPORATION
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
WARRANT AGREEMENT
Dated as of June 1, 2000
1
<PAGE>
CLASS B and CLASS C
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "Agreement"), dated as of June 1, 2000, by and
among ISONICS CORPORATION, a California corporation (the "Company"), and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant
Agent"), and each of their successors and assigns.
W I T N E S S E T H:
WHEREAS, in connection with (i) the Company's underwritten initial public
offering pursuant to a registration statement on Form SB-2, an unaffiliated
party as underwriter sold on behalf of the Company 810,000 Units consisting of
810,000 shares of Common Stock (as defined in Section 1), and 810,000 Class A
redeemable common stock purchase warrants (the "Class A Warrants"), each warrant
entitling the holder thereof to purchase one additional share of Common Stock;
and (ii) the sale to the underwriter of warrants (the "Underwriter's Warrants")
to purchase up to 80,000 shares of Common Stock and/or 80,000 Warrants, the
Company issued 890,000 Warrants (subject to adjustment as provided herein and in
the Underwriter's Warrant Agreement); and
WHEREAS, the Company has determined to offer the holders of the Class A
Warrants an incentive to exchange the Class A Warrants for Class B Warrants (as
defined elsewhere herein) pursuant to a registration statement on Form S-4 (the
"Exchange Offer"); and
WHEREAS, certain persons who have exercised the Class A Warrants are
entitled to receive Class C Warrants (as defined elsewhere herein) for no
additional consideration; and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Class B Warrants and Class C Warrants (collectively referred to
as the "Class B/C Warrants" or (when the context requires the "Warrants"); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Class B/C
Warrants, the issuance of certificates representing the Class B/C Warrants, the
exercise of the Class B/C Warrants and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Class B/C Warrants and the certificates representing the Class B/C
Warrants and the respective rights and obligations thereunder of the Company,
the holders of certificates representing the Class B/C Warrants, and the Warrant
Agent, the parties hereto agree as follows:
2
<PAGE>
1. DEFINITIONS. As used herein (and in addition to the definitions set forth
above in the Recitals), the following terms shall have the following
meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Common Stock" shall have the meaning assigned to it in Section 8(h)
hereof.
(c) "Class A Warrants" shall mean the outstanding Class A Redeemable
Common Stock Purchase Warrants of the Corporation which are subject to
an agreement between the Corporation, the Warrant Agent, and the
underwriter dated September 22, 1997.
(d) "Class B Warrants" shall mean the Warrants being offered in exchange
for the outstanding Class A Warrants.
(e) "Class C Warrants" shall mean the Warrants issuable upon exercise of
the Class B Warrants.
(f) "Commission" shall mean the Securities and Exchange Commission.
(g) "Corporate Office" shall mean the office of the Warrant Agent (or its
successor) at which at any particular time its business shall be
administered, which office is located on the date hereof c/o
Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor,
New York, NY 10004.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(i) "Exercise Date" shall mean, subject to the provisions of Section 5(b)
hereof, as to any Warrant, the date on which the Warrant Agent shall
have received both (i) the Warrant Certificate representing such
Warrant, with the exercise form thereon duly executed by the
Registered Holder hereof or his attorney duly authorized in writing;
and (ii) payment in cash or by official bank or certified check made
payable to the Warrant Agent for the account of the Company, in the
amount in lawful money of the United States of America equal to the
applicable Purchase Price (as hereinafter defined) in good funds.
(j) "Exercise Price" shall mean, subject to modification and adjustment as
provided in Section 8, $5.80 per share for the Class B Warrants and
$10.00 per share for the Class C Warrants, and further subject to the
Company's right, in its sole discretion, to decrease the Exercise
Price on not less than thirty (30) days prior written notice to the
Registered
3
<PAGE>
Holders.
(k) "Initial Warrant Exercise Date" shall mean the date of issuance with
respect to the Class B Warrants and the Class C Warrants.
(l) "Initial Warrant Redemption Date" shall mean the date of issuance with
respect to the Class C Warrants. The Class B Warrants are not
redeemable.
(m) "Market Price" shall mean
(i) if the Common Stock is listed, or admitted to unlisted trading
privileges on a national securities exchange, or is traded on the
Nasdaq National Market or Nasdaq, the last reported closing sale
price on the five trading days prior to the date of the event to
which such Market Price relates, or, if no such reported closing
sale takes place on such date, then the average of the last
reported closing sales prices for the last five trading days
before such date, in each case as officially reported by the
principal securities exchange on which the Common Stock is listed
or admitted to unlisted trading privileges or by the Nasdaq
National Market or Nasdaq, or
(ii) if the Common Stock is not listed or admitted to unlisted trading
privileges, on any national securities exchange, or traded on the
Nasdaq National Market or Nasdaq, but is traded in the
over-the-counter market, then the average of the closing sale
prices (or if closing sale prices are not reported, the average
of the last reported bid and asked prices) of the Common Stock
reported by the National Quotation Bureau, Inc. or similar bureau
if the National Quotation Bureau, Inc. is no longer reporting
such information on the date of the event to which such Market
Price relates, and if no such prices are reported on such date,
then the average of the last so reported bid and asked prices on
the last five trading days on which such prices are reported
immediately preceding such date; or
(iii) if the Common Stock is neither listed, nor admitted to unlisted
trading privileges on a national securities exchange, nor traded
on the Nasdaq National Market or Nasdaq, nor traded in the
over-the-counter market, then the fair market value of the Common
Stock, not less that the book value thereof, as of the date of
the event to which such Market Price relates, as determined in
good faith (using customary valuation methods) by the Board of
Directors of the Company, which determination shall be evidenced
by a resolution of the Board of Directors and based on the best
information available to it.
(n) "NASD" shall mean the National Association of Securities Dealers, Inc.
(o) "Nasdaq" shall mean the Nasdaq SmallCap Market.
(p) "Redemption Date" shall mean the date (which may not occur before the
4
<PAGE>
Initial Warrant Redemption Date) fixed for the redemption of the Class
C Warrants in accordance with the terms hereof.
(q) "Redemption Price" shall mean the price at which the Company may, at
its option, redeem the Warrants, in accordance with the terms hereof,
which price shall be $0.10 per Warrant, subject to adjustment from
time to time pursuant to the provisions of Section 9 hereof.
(r) "Registered Holder" shall mean each person in whose name a Warrant
Certificate representing any of the Warrants shall be registered on
the books maintained by the Warrant Agent pursuant to Section 6.
(s) "Underwriter's Warrant Agreement" shall mean the agreement dated as of
September 22, 1997 between the Company and Monroe Parker Securities,
Inc. relating to and governing the terms and provisions of the
Underwriter's Warrants.
(t) "Transfer Agent" shall mean Continental Stock Transfer & Trust
Company, or its authorized successor.
(u) "Underwriting Agreement" shall mean the underwriting agreement dated
as of September 22, 1997 between the Company and the underwriter
relating to the Offering.
(v) "Warrant Certificate" shall mean a certificate representing one or
more of the Warrants substantially in the form annexed as Exhibit A
(with respect to the Class B Warrants") or Exhibit B (with respect to
the Class C Warrants").
(w) "Warrant Expiration Date" shall mean, unless the Warrants are redeemed
as provided in Section 9 hereof prior to such date, 5:00 p.m. (New
York time): (i) with respect to the Class B Warrants, on _______ (90
days from the date hereof), and (ii) with respect to the Class C
Warrants, on _______ (three years after the date hereof), or in either
case, the Redemption Date as defined herein, whichever date is
earlier; provided that if such date shall in the State of New York be
a holiday or a day on which banks located in the State of New York are
authorized to close, then 5:00 p.m. (New York time) on the next
following day which, in the State of New York, is neither a holiday
nor a day on which such banks are authorized to close. Upon prior
written notice to the Registered Holders, the Company (in its sole
discretion) shall have the right to extend the Warrant Expiration
Date.
2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) Each Class B Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase at the
Exercise
5
<PAGE>
Price therefor from the Initial Warrant Exercise Date until the
Warrant Expiration Date one share of Common Stock and one Class C
Warrant upon the exercise thereof in accordance with the terms hereof
(subject to modification and adjustment as provided in Section 8).
(b) Each Class C Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase at the
Exercise Price therefor from the Initial Warrant Exercise Date until
the Warrant Expiration Date one share of Common Stock upon the
exercise thereof in accordance with the terms hereof (subject to
modification and adjustment as provided in Section 8).
(c) Upon execution of this Agreement, Warrant Certificates representing
the number of Class B Warrants exchanged pursuant to the exchange
offer (subject to modification and adjustment as provided in Section
8) shall be executed by the Company and delivered to the Warrant
Agent.
(d) Upon exercise of the Underwriter's Warrants as provided therein,
Warrant Certificates representing all or a portion of 80,000 Warrants
to purchase up to an aggregate of 80,000 shares of Common Stock
(subject to modification and adjustment as provided in Section 8
hereof and in the Underwriter's Warrant Agreement), shall be
countersigned, issued and delivered by the Warrant Agent upon written
order of the Company signed by its Chairman of the Board, Chief
Executive Officer, President or a Vice President and by its Chief
Financial Officer, Treasurer or an Assistant Treasurer or its
Secretary or an Assistant Secretary.
(e) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person
entitled thereto in connection with any transfer or exchange permitted
under this Agreement. Except as provided herein, no Warrant
Certificates shall be issued except: (i) Warrant Certificates
initially issued hereunder and those issued on or after the Initial
Warrant Exercise Date, upon the exercise of fewer than all Warrants
held by the exercising Registered Holder, (ii) Warrant Certificates
issued upon any transfer or exchange of Warrants, (iii) Warrant
Certificates issued in replacement of lost, stolen, destroyed or
mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued pursuant to the Underwriter's Warrant Agreement;
and (v) at the option of the Company, Warrant Certificates may be
issued in such form as may be approved by its Board of Directors, to
reflect any adjustment or change in the Exercise Price, the number of
shares of Common Stock purchasable upon exercise of the Warrants or
the Redemption Price therefor made pursuant to Section 8 hereof.
3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
6
<PAGE>
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibits A and B (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks
of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company
may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed,
or to conform to usage. The Warrant Certificates shall be dated the
date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates) and issued in registered form. Warrants shall be
numbered serially with the letters "WB" on the Class B Warrants and
with the letters "WC" on the Class C Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Chief Financial Officer, Treasurer or an
Assistant Treasurer or its Secretary or an Assistant Secretary, by
manual signatures or by facsimile signatures printed thereon, and
shall have imprinted thereon a facsimile of the Company's seal.
Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer of the Company
after the date of signature but before the date of issuance of the
Warrant Certificates or before countersignature by the Warrant Agent
and issuance and delivery thereof, such Warrant Certificates,
nevertheless, may be countersigned by the Warrant Agent, issued and
delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of
the Company. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered
Holder promptly and without further action by the Company.
4. EXERCISE.
(a) Warrants in denominations of one or whole number multiples thereof may
be exercised by the Registered Holder thereof commencing at any time
on or after the Initial Warrant Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions
set forth herein and in the applicable Warrant Certificate. Warrants
may be exercised by their holders as follows: The exercise of Warrants
shall be accomplished upon surrender of the Warrant Certificate
evidencing such Warrants, with the Subscription Form on the reverse
side thereof duly filled in and executed, to the Warrant Agent at its
business office, together
7
<PAGE>
with payment to the Warrant Agent of the Exercise Price (as of the
date of such surrender) of the Warrants then being exercised and an
amount equal to any applicable transfer tax and, if requested by the
Company, any other taxes or governmental charges which the Company may
be required by law to collect in respect of such exercise.
(b) Payment of the Exercise Price and other amounts may be made by wire
transfer of good funds, or by certified or bank cashier's check,
payable in lawful money of the United States of America to the order
of the Company and deliver such payment to the Warrant Agent who shall
in turn deliver the payment to the Company. No adjustment shall be
made for any cash dividends, whether paid or declared, on any
securities issuable upon exercise of a Warrant. A Warrant shall be
deemed to have been exercised immediately prior to the close of
business on the Exercise Date and upon exercise thereof, the person
entitled to receive the securities deliverable upon such exercise
shall be treated for all purposes as the holder of the securities
issuable thereby as of the close of business on the Exercise Date. If
Warrants in denominations other than whole number multiples thereof
shall be exercised at one time by the same Registered Holder, the
number of full shares of Common Stock which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate
number of full shares of Common Stock issuable upon such exercise. As
soon as practicable on or after the Exercise Date and in any event
within five business days after such date, if one or more Warrants
have been exercised in the manner described in this subsection (a),
the Warrant Agent on behalf of the Company shall cause to be issued to
the person or persons entitled to receive the same a Common Stock
certificate or certificates for the shares of Common Stock deliverable
upon such exercise, and the Warrant Agent shall deliver the same to
the person or persons entitled thereto. Upon the exercise of any one
or more Warrants, the Warrant Agent shall promptly notify the Company
in writing of such fact and of the number of securities delivered upon
such exercise and, subject to subsection (b) below, shall cause
payment in cash or by check made payable to the order of the Company,
equal to the Exercise Price of such Warrants, to be deposited promptly
in the Company's bank account or paid directly to the Company, as
specified by the Company.
(c) The Company shall not be required to issue fractional shares on the
exercise of Warrants. Warrants may be exercised only in such multiples
as are required to permit the issuance by the Company of one or more
whole shares. If one or more Warrants shall be presented for exercise
in full at the same time by the same Registered Holder, the number of
whole shares which shall be issuable upon such exercise thereof shall
be computed on the basis of the aggregate number of shares purchasable
on exercise of the Warrants presented. If any fraction of a share
would, except for the provisions provided herein, be issuable on the
exercise of any Warrant (or
8
<PAGE>
specified portion thereof), the Company shall pay an amount in cash
equal to such fraction multiplied by the then current Market Price of
a share of Common Stock.
(d) Holders of Class A Warrants may, in their discretion, exercise the
Class B Warrants at the same time the holders submit their Class A
Warrants for exchange pursuant to the Exchange Offer.
5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose
of issue upon exercise of Warrants, such number of shares of Common
Stock as shall then be issuable upon the exercise of all outstanding
Warrants. The Company covenants that all shares of Common Stock which
shall be issuable upon exercise of the Warrants shall, at the time of
delivery thereof, be validly issued, fully paid and nonassessable and
free from all preemptive or similar rights, taxes, liens and charges
with respect to the issue thereof, and that upon issuance such shares
shall be listed on each securities exchange, if any, on which the
other shares of outstanding Common Stock of the Company are then
listed.
(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with,
or approval of, any governmental authority under any federal
securities law before such securities may be validly issued or
delivered upon such exercise, then the Company will file a
registration statement under the federal securities laws or a
post-effective amendment covering such securities, use its best
efforts to cause the same to become effective and to keep such
registration statement current on or after the Initial Warrant
Exercise Date and while any of the Warrants are outstanding and
deliver a prospectus which complies with Section 10(a)(3) of the Act
to the Registered Holder exercising the Warrant (except, if in the
opinion of counsel to the Company, such registration is not required
under the federal securities laws or if the Company receives a letter
from the staff of the Commission stating that it would not take any
enforcement action if such registration is not effected; PROVIDED,
HOWEVER, that (i) if at the time of exercise of any Warrants the
Company does not have in place an effective registration statement or
is otherwise, in the good faith determination of the Board of
Directors of the Company, precluded by applicable laws from issuing
the underlying shares of Common Stock, the Company may, in lieu of
issuance of the shares of Common Stock, elect to ` the Warrants duly
surrendered for exercise for a price per Warrant equal to the
difference between the Market Price of the securities for which such
Warrant is exercisable on the date of such submission and the Exercise
Price of such Warrants, and in the event of such redemption, the
Company
9
<PAGE>
will pay to the holder of such Warrants the above-described redemption
price in cash within ten (10) business days after receipt of notice
from the Warrant Agent that such Warrants have been submitted for
exercise; and (ii) if the Market Price of the Common Stock is less
than the Exercise Price, then the Company need not take such actions
to file a registration statement (or a post-effective amendment to a
registration statement) with respect to the issuance of Common Stock
upon exercise of the Warrants until such time as the Company has been
subject to the requirements of Section 12 or 15(d) of the Exchange Act
for a period of at least twelve calendar months immediately preceding
the filing of the registration statement). The Company will use its
best efforts to obtain appropriate approvals or registrations under
state "blue sky" securities laws with respect to any such securities.
However, Warrants may not be exercised by, or shares of Common Stock
issued to, any Registered Holder in any state in which such exercise
or issuance would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares of
Common Stock upon exercise of the Warrants; provided, however, that if
shares of Common Stock are to be delivered in a name other than the
name of the Registered Holder of the Warrant Certificate representing
any Warrant being exercised, then no such delivery shall be made
unless the person requesting the same has paid to the Warrant Agent
the amount of transfer taxes or charges incident thereto, if any;
provided, however, that the Company shall not be required (i) to pay
any tax which may be payable in respect of any transfer involved in
the transfer and delivery of Warrant Certificates; or (ii) to issue or
deliver any certificate for shares of Common Stock or other securities
upon the exercise of any Warrant Certificate until any such tax shall
have been paid, all such tax being payable by the holder of such
Warrant Certificate at the time of surrender.
(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing
shares of Common Stock or other securities required to be issued upon
exercise of the Warrants, and the Company will comply with all such
requisitions.
6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant Certificates
representing an equal aggregate number of Warrants of the same class
or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate
Office, and, promptly following satisfaction of the terms and
provisions hereof, the Company shall execute and the Warrant Agent
shall countersign, issue and deliver in exchange therefor the Warrant
Certificate
10
<PAGE>
or Certificates which the Registered Holder making the exchange shall
be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books in which, subject
to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with
customary practice. Upon due presentment for registration of transfer
of any Warrant Certificate at such office, the Company shall execute
and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an
equal aggregate number of Warrants of the same class.
(c) With respect to all Warrant Certificates presented for registration of
transfer, or for exchange or exercise, the Subscription Form on the
reverse thereof shall be duly endorsed or be accompanied by a written
instrument or instruments of transfer and subscription, in form
satisfactory to the Company and the Warrant Agent, duly executed by
the Registered Holder thereof or his attorney-in-fact duly authorized
in writing.
(d) A service charge may be imposed on the Registered Holder by the
Warrant Agent for any exchange or registration of transfer of Warrant
Certificates. In addition, the Company may require payment by such
holder of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange in
case of mutilated Warrant Certificates shall be promptly canceled by
the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder
of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of
ownership or writing thereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
7. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent of
evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the
Company and/or the Warrant Agent that a new Warrant Certificate has been
acquired by a bona fide purchaser) countersign and deliver to the
Registered Holder in lieu thereof a new Warrant Certificate of like
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tenor representing an equal aggregate number of Warrants. Applicants for
substitute Warrant Certificates shall also comply with such other
reasonable regulations and pay such other reasonable charges and provide a
bond (if necessary) as the Warrant Agent may prescribe.
8. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE AND EXERCISE PRICE.
The number and kind of securities or other property purchasable upon
exercise of a Warrant shall be subject to adjustment from time to time upon
the occurrence, after the date hereof, of any of the following events:
(a) DIVIDENDS, STOCK SPLITS, REVERSE SPLITS, ETC. In case the Company
shall (i) pay a dividend in, or make a distribution of, shares of
Common Stock or of capital stock convertible into Common Stock on its
outstanding Common Stock, (ii) subdivide its outstanding shares of
Common Stock into a greater number of such shares, or (iii) combine
its outstanding shares of Common Stock into a smaller number of such
shares, the total number of shares of Common Stock purchasable upon
the exercise of each Warrant outstanding immediately prior thereto
shall be adjusted so that the Registered Holder of any Warrant
Certificate thereafter surrendered for exercise shall be entitled to
receive, at the same aggregate Exercise Price, the number of shares of
Common Stock which such holder would have owned or have been entitled
to receive immediately following the happening of any of the events
described above had such Warrant been exercised in full immediately
prior to the occurrence of such event. Any adjustment made pursuant to
this subsection shall, in the case of a stock dividend or
distribution, become effective as of the record date therefor and, in
the case of a subdivision or combination, be made as of the effective
date thereof. If, as a result of an adjustment made pursuant to this
subsection, the Registered Holder of any Warrant Certificate
thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock of the Company, the
Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a Board resolution filed with the
Warrant Agent) shall determine the allocation of the Exercise Price
among shares of such classes of capital stock.
(b) NO CHANGE IN AGGREGATE EXERCISE PRICE. In the event of any adjustment
of the total number of shares of Common Stock purchasable upon the
exercise of Warrants pursuant to subsection (a) above, the aggregate
Exercise Price of each such Warrant shall remain unchanged, but the
number of shares of capital stock obtainable on exercise of each such
Warrant shall be adjusted as provided in subsection (a) above.
(c) REORGANIZATION OR RECLASSIFICATION. In the event of a capital
reorganization or a reclassification of the Common Stock (except as
provided in subsection (a) above or subsection (e) below), each
Registered
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Holder of a Warrant, upon exercise of such Warrant, shall be entitled
to receive at the same aggregate Exercise Price, in substitution for
the Common Stock to which such Registered Holder would have become
entitled upon exercise immediately prior to such reorganization or
reclassification, the shares or other securities or property of the
Company (or cash) that he would have been entitled to receive upon
such reorganization or reclassification if such Warrant had been
exercised immediately prior thereto; and in any such case, appropriate
provision (as determined by the Board of Directors of the Company,
whose determination shall be conclusive and shall be evidenced by a
certified Board resolution filed with the Warrant Agent) shall be made
for the application of this Section 8 with respect to the rights and
interests thereafter of the Registered Holders of all then outstanding
Warrants (including but not limited to the allocation of the Exercise
Price among shares of classes of capital stock), to the end that this
Section 8 (including the adjustments of the number of shares of Common
Stock or other securities purchasable and the Exercise Price thereof)
shall thereafter be reflected, as nearly as reasonably practicable, in
all subsequent exercises of the Warrants for any shares or securities
or other property (or cash) thereafter deliverable upon the exercise
of the Warrants.
(d) CERTIFICATE OF ADJUSTMENT. Whenever the number of shares of Common
Stock or other securities purchasable upon exercise of a Warrant is
adjusted as provided in this Section 8, the Company will promptly file
with the Warrant Agent a certificate signed by a Chairman or
Vice-Chairman of the Board or the President or a Vice President of the
Company and by the Chief Financial Officer, Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company
setting forth the number and kind of securities or other property
purchasable upon exercise of a Warrant, as so adjusted, stating that
such adjustments in the number or kind of shares or other securities
or property conform to the requirements of this Section 8, and setting
forth a brief statement of the facts accounting for such adjustments.
Promptly after receipt of such certificate, the Company, or the
Warrant Agent at the Company's request, will deliver, by first-class
mail, postage pre-paid, a brief summary thereof (to be supplied by the
Company) to all Registered Holders of the outstanding Warrant
Certificates; provided, however, that failure to file or to give any
notice required under this subsection, or any defect therein, shall
not affect the legality or validity of any such adjustments under this
Section 8; and provided, further, that, where appropriate, such notice
may be given in advance and included as part of the notice required to
be given pursuant to Section 12 hereof.
(e) MERGER OR CONSOLIDATION. In case of any consolidation of the Company
with, or merger of the Company into another corporation (other than a
consolidation or merger which does not result in any reclassification
or
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change of the outstanding Common Stock) or in case of any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety in a transaction involving as
an element thereof the distribution of the consideration received by
the Company therefrom, the corporation formed by such consolidation or
merger or the corporation which shall have acquired such assets, as
the case may be, shall execute and deliver to the Warrant Agent a
supplemental warrant agreement provided that the Registered Holder of
each Warrant then outstanding shall have the right thereafter (until
the expiration of such Warrant) to receive, upon exercise of such
Warrant, solely the kind and amount of shares of stock and other
securities and property (or cash) receivable upon such consolidation,
merger, sale or transfer by a holder of the number of shares of Common
Stock of the Company for which such Warrant could have been exercised
immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments,
which shall be as nearly equivalent as may be practicable to the
adjustments provided in this Section 8. The above provision of this
Subsection 8(e) shall similarly apply to successive consolidations,
mergers, sales or transfers.
(f) EFFECT OF ADJUSTMENTS ON WARRANT CERTIFICATES. Irrespective of any
adjustments in the number or kind of shares issuable upon exercise of
Warrants, Warrant Certificates theretofore or thereafter issued may
continue to express the same price and number and kind of shares as
are stated in the Warrant Certificates initially issuable pursuant to
this Warrant Agreement.
(g) ASSISTANCE OF ACCOUNTING FIRM IN MAKING COMPUTATIONS. The Company may
retain a firm of independent public accountants of recognized
standing, which may be the accountants regularly retained by the
Company, selected by the Board of Directors of the Company or the
Executive Committee of said Board, and not disapproved by the Warrant
Agent, to make any computation required under this Section 8, and a
certificate signed by such firm shall, in the absence of fraud or
gross negligence, be conclusive evidence of the correctness of any
computation made under this Section.
(h) "COMMON STOCK". The term "Common Stock" shall mean (i) the class of
stock designated as Common Stock in the Certificate of Incorporation
of the Company, as amended, at the date of this Agreement; or (ii) any
other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in
par value, or from par value to no par value, or from no par value to
par value. In the event that at any time as a result of an adjustment
made pursuant to this Section 8, the Registered Holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive
any shares of capital stock of the
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Company other than shares of Common Stock, thereafter the number of
such other shares obtainable upon exercise of any Warrant shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section 8, and all other provisions of
this Agreement, with respect to the Common Stock, shall apply on like
terms to any such other shares.
9. REDEMPTION.
(a) Commencing on the Initial Warrant Redemption Date, the Company may, on
thirty (30) days' prior written notice, redeem all, but not less than
all, the Warrants at ten cents ($0.10) per Warrant, provided, however,
that before any such call for redemption of Warrants can take place,
the last reported closing sale price for the Common Stock as
officially reported by Nasdaq, if the Common Stock is then traded on
Nasdaq (or the last reported closing sale price on the Nasdaq National
Market or a national securities exchange, if the Common Stock is then
traded on the Nasdaq National Market or on a national securities
exchange, in each case as officially reported by the Nasdaq National
Market or such national securities exchange, or, if the Common Stock
is not then traded on Nasdaq, the Nasdaq National Market or a national
securities exchange, but is then traded in the over-the-counter
market, then the average of the last reported bid and asked prices of
the Common Stock reported by the National Quotation Bureau, Inc. or
similar bureau if the National Quotation Bureau, Inc. is no longer
reporting such information) shall have equaled or exceeded $15.00 per
share (subject to adjustment in the event of any stock splits or other
similar events as provided in Section 8 hereof) for at least twenty
(20) consecutive trading days of the thirty (30) trading days ending
not more than the third day prior to the date on which the notice
contemplated by (b) and (c) below is given.
(b) In case the Company shall exercise its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants by mailing to such Registered Holders a notice
of redemption, first-class mail, postage pre-paid, at their last
address as shall appear on the records of the Warrant Agent. Any
notice mailed in the manner provide herein shall be conclusively
presumed to have been duly given whether or not the Registered Holder
receives such notice..
(c) The notice of redemption shall specify (i) the Redemption Price, (ii)
the Redemption Date, which shall in no event be less than thirty (30)
days after the date of mailing of such notice, (iii) the place where
the Warrant Certificate shall be delivered and the Redemption Price
shall be paid, and (iv) that the right to exercise the Warrant shall
terminate at 5:00 p.m. (New York time) on the business day immediately
preceding the date
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fixed for redemption. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity of the
proceedings for such redemption except as to a holder (a) to whom
notice was not mailed; or (b) whose notice was defective. An affidavit
of the Warrant Agent or the Secretary or Assistant Secretary of the
Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New York
time) on the business day immediately preceding the Redemption Date.
The Redemption Price payable to the Registered Holders shall be mailed
to such persons at their addresses of record.
(e) On and after the date fixed for redemption, the Registered Holders
shall have no rights with respect to the Warrants except to receive
the $0.10 per Warrant upon surrender of their Warrant Certificates.
10. CONCERNING THE WARRANT AGENT.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by
the provisions hereof. The Warrant Agent shall not, by issuing and
delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or
authorization of the Warrant Certificates (except its countersignature
thereof) or the Warrants represented thereby or of any securities or
other property delivered upon exercise of any Warrant or whether any
stock issued upon exercise of any Warrant is fully paid and
nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause
to be made any adjustment of the Exercise Price or the Redemption
Price provided in this Agreement, or to determine whether any fact
exists which may require any such adjustments, or with respect to the
nature or extent of any such adjustments, when made, or with respect
to the method employed in making the same (except with respect to the
exercise of Warrant Certificates after actual notice of any adjustment
of the Exercise Price). The Warrant Agent shall not (i) be liable for
any recital or statement of fact contained herein or for any action
taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good
faith to be genuine and to have been signed or presented by the proper
party or parties (except its countersignature on the Warrant
Certificates and such statements or recitals as describe the Warrant
Agent or action taken or to be taken by it); (ii) be responsible for
any failure on the part of the Company to comply with any of its
covenants and obligations contained in this Agreement or
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<PAGE>
in any Warrant Certificate; or (iii) be liable for any act or omission
in connection with this Agreement except for its own gross negligence,
bad faith or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel satisfactory to
it (who may be counsel for the Company) and shall incur no liability
or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, Chief Executive
Officer, Chief Financial Officer, President or any Vice President
(unless other evidence in respect thereof is herein specifically
prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand reasonably
believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the
Warrant Agent and save it harmless from and against any and all
losses, expenses and liabilities, including judgments, costs and
counsel fees, for anything done or omitted by the Warrant Agent in the
execution of its duties and powers hereunder except losses, expenses
and liabilities arising as a result of the Warrant Agent's gross
negligence, bad faith or willful conduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities resulting
as a result of the Warrant Agent's own gross negligence or willful
misconduct), after giving thirty (30) days' prior written notice to
the Company. At least fifteen (15) days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a
copy of such notice of resignation to be mailed to the Registered
Holder of each Warrant Certificate at the Company's expense. Upon such
resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint in writing a new warrant agent.
If the Company shall fail to make such appointment within a period of
fifteen (15) days after it has been notified in writing of such
resignation by the resigning Warrant Agent, then the Registered Holder
of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new
warrant agent, whether appointed by the Company or by such a court,
shall be a bank or trust company having a capital and surplus, as
shown by its last published report to its stockholders deemed by the
Company to be adequate, or a stock transfer company. After acceptance
in writing of such appointment by the new warrant agent is received by
the Company, such
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new warrant agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named herein as the
Warrant Agent, without any further assurance, conveyance, act or deed;
but if for any reason it shall be necessary or expedient to execute
and deliver any further assurance, conveyance, act or deed, the same
shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not
later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall
forthwith cause a copy of such notice to be mailed to the Registered
Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent
shall be a party, or any corporation succeeding to the corporate trust
business of the Warrant Agent or any new warrant agent shall be a
successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as
successor to the Warrant Agent under the provisions of the preceding
paragraph. Any such successor warrant agent shall promptly cause
notice of its succession as warrant agent to be mailed to the Company
and to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in
the same manner and to the same extent and with like effect as though
it were not Warrant Agent. Nothing herein shall preclude the Warrant
Agent from acting in any other capacity for the Company or for any
other legal entity.
(i) The Warrant Agent shall retain for a period of two (2) years from the
date of exercise, any Warrant Certificate received by it upon such
exercise.
(j) The Warrant Agent shall account promptly to the Company with respect
to Warrants exercised and concurrently pay to the Company all moneys
received by the Warrant Agent for the purchase of securities or other
property through the exercise of such Warrants.
11. MODIFICATION OF AGREEMENT. The Warrant Agent and the Company may by
supplemental agreement make any changes or corrections in this Agreement
(i) that they shall deem appropriate to cure any ambiguity or to correct
any defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which
shall not adversely affect the interests of the holders of Warrant
Certificates; provided, however, that this Agreement shall not otherwise be
modified, supplemented or altered in any respect except with the consent in
writing of the Registered Holders representing not less
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than 66-2/3% of the Warrants then outstanding; provided, further, that no
change in the number or nature of the securities purchasable upon the
exercise of any Warrant, or to increase the Exercise Price therefor or to
accelerate the Warrant Expiration Date shall be made without the consent in
writing of the Registered Holder of the Warrant Certificate representing
such Warrant, other than such changes as are presenting specifically
prescribed by this Agreement as originally executed.
12. NOTICES. All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class registered or certified mail, postage prepaid, as
follows: if to the Registered Holder of a Warrant Certificate, at the last
address of such holder as shown on the registry books maintained by the
Warrant Agent; if to the Company at 5906 McIntyre Street, Golden, Colorado
80403, Attention: CEO, or at such other address as may have been furnished
to the Warrant Agent in writing by the Company; and if to the Warrant
Agent, to the attention of the Compliance Department at 2 Broadway, 19th
Floor, New York, NY 10004, or at such other address as any such party may
have been furnished to the Company and the Warrant Agent in writing.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of laws or choice of law principles.
14. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the Company, the Warrant Agent and their respective successors
and assigns and the Registered Holders from time to time of Warrant
Certificates or any of them. Nothing in this Agreement is intended or shall
be construed to confer upon any other person any right, remedy or claim, in
equity or at law, or to impose upon any other person any duty, liability or
obligation.
15. TERMINATION.
(a) This Agreement shall terminate at the close of business on the
Expiration Date of all of the Warrants or such earlier date upon which
all Warrants have been exercised or redeemed, except that the Warrant
Agent shall account to the Company for all Warrants outstanding and
all cash held by it and the provisions of Section 10 hereof shall
survive such termination.
(b) The Company, at it sole discretion, may terminate this Agreement upon
thirty (30) days prior written notice to the Warrant Agent.
Termination of this Agreement will be without prejudice to the rights
and obligations accrued pursuant to this Agreement or any other
agreement between the Parties through the date of termination. The
provisions of this Agreement survive its termination as set forth
herein.
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16. COUNTERPARTS. This Agreement may be executed in several counterparts each
of which shall be an original, but all of which taken together shall
constitute a single instrument.
17. HOLDERS OF WARRANTS NOT DEEMED SHAREHOLDERS. No holder of a Warrant, as
such, shall be entitled to vote, receive dividends or be deemed the holder
of Common Stock or any other securities of the Company which may at any
time be issuable on the exercise of the Warrants represented thereby for
any purpose whatever, nor shall anything contained herein or in any Warrant
Certificate be construed to confer upon any holder of a Warrant, as such,
any of the rights of a shareholder of the Company or any right to vote for
the election of directors or upon any matter submitted to shareholders at
any meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issuance of stock, reclassification of
stock, change of par value or change of stock to no par value,
consolidation, merger, conveyance or otherwise), or to receive notice of
meetings or other actions affecting shareholders, or to receive dividend or
subscription rights, or otherwise, until such Warrant shall have been
exercised in accordance with the provisions hereof, including the receipt
by the Company of the Exercise Price and any other amounts payable upon
such exercise to the Warrant Agent.
18. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement or in the Warrant
Certificates shall be construed to give to any person or corporation other
than the Company, the Warrant Agent, and their respective successors and
assigns hereunder and the Registered Holders of the Warrant Certificates
any legal or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sole and exclusive benefit of the Company,
the Warrant Agent, their respective successors and assigns hereunder and
the Registered Holders of the Warrant Certificates.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the first date first above written.
ATTEST: ISONICS CORPORATION
By: By:
------------------------- ---------------------------
Brantley J. Halstead, Secretary James E. Alexander, President
ATTEST: CONTINENTAL STOCK TRANSFER & TRUST
COMPANY, as Warrant Agent
By: By:
------------------------- ---------------------------
Name: Name:
----------------------- -------------------------
Title: Title:
---------------------- ------------------------
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Exhibit A
No. WB______ VOID AFTER _________, 2000
WARRANTS
CLASS B WARRANT CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK
ISONICS CORPORATION
CUSIP # _________________
THIS CERTIFIES THAT, FOR VALUE RECEIVED ___________________________ or its
registered assigns (the "Registered Holder") is the owner of the number of Class
B Warrants (the "Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and the Warrant Agreement (as hereinafter defined):
one fully paid and nonassessable share of Common Stock of Isonics
Corporation, a California corporation (the "Company"), and
one Class C Redeemable Common Stock Purchase Warrant,
at any time commencing on the date hereof, and the earlier to occur of the
Expiration Date (as hereinafter defined) and the Redemption Date (as hereinafter
defined) upon the presentation and surrender of this Warrant Certificate with
the Subscription Form on the reverse hereof duly executed, at the corporate
office of Continental Stock Transfer & Trust Company, as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of $5.80 per share,
subject to adjustment (the "Exercise Price"), in lawful money of the United
States of America in cash or by check made payable to the Warrant Agent for the
account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated ________, 2000,
by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or
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Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on (i) the
date which is _____________________. If each such date shall in the State of New
York be a holiday or a day on which banks located in the State of New York are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is neither a holiday
nor a day on which such banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, following the date hereof and while any of the Warrants are
outstanding, and deliver a prospectus which complies with Section 10(a)(3) of
the Act to the Registered Holder exercising this Warrant; provided however, that
(i) if at the time of exercise of any of the Warrants, the Company does not have
in place an effective registration statement or is otherwise, in the good faith
determination of the Board of Directors of the Company, precluded by applicable
laws from issuing the shares of Common Stock issuable upon such exercise, the
Company may, in lieu of issuance of those shares, elect to redeem the Warrants
duly surrendered for exercise for a price per Warrant equal to the difference
between the Market Price (as defined below) of a share of Common Stock on the
date of such submission and the Exercise Price, and in the event of such
redemption, the Company will pay to the Registered Holder the above-described
Redemption Price in cash within ten (10) business days after receipt of notice
from the Warrant Agent that such Warrants have been submitted for exercise; and
(ii) if the Market Price of the Common Stock is less than the Exercise Price,
then the Company need not take such actions to file a registration statement (or
a post-effective amendment to a registration statement) with respect to the
issuance of Common Stock upon exercise of the Warrants until such time as the
Company has been subject to the requirements of Section 12 or 15(d) of the
Securities Exchange Act of 1934, as amended, for a period of at least twelve
calendar months immediately preceding the filing of the registration statement.
This Warrant shall not be exercisable by a Registered Holder in any state where
such exercise would be unlawful.
The term "Market Price" shall mean: (i) if the Common Stock is listed, or
admitted to unlisted trading privileges on a national securities exchange, or is
traded on the Nasdaq National Market or Nasdaq, the last reported closing sale
price on the five trading days prior to the date of the event to which such
Market Price relates, or, if no such reported closing sale takes place on such
date, then the average of the last reported closing sales prices for the last
five trading days before such date, in each case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
unlisted trading privileges or by the Nasdaq National Market or
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Nasdaq, or (ii) if the Common Stock is not listed or admitted to unlisted
trading privileges, on any national securities exchange, or traded on the Nasdaq
National Market or Nasdaq, but is traded in the over-the-counter market, then
the average of the closing sale prices (or if closing sale prices are not
reported, the average of the last reported bid and asked prices) of the Common
Stock reported by the National Quotation Bureau, Inc. or similar bureau if the
National Quotation Bureau, Inc. is no longer reporting such information on the
date of the event to which such Market Price relates, and if no such prices are
reported on such date, then the average of the last so reported bid and asked
prices on the last five trading days on which such prices are reported
immediately preceding such date; or (iii) if the Common Stock is neither listed,
nor admitted to unlisted trading privileges on a national securities exchange,
nor traded on the Nasdaq National Market or Nasdaq, nor traded in the
over-the-counter market, then the fair market value of the Common Stock, not
less that the book value thereof, as of the date of the event to which such
Market Price relates, as determined in good faith (using customary valuation
methods) by the Board of Directors of the Company, which determination shall be
evidenced by a resolution of the Board of Directors and based on the best
information available to it.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and the
Company's right so to treat the Registered Holder shall not be affected by any
notice to the contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of California without reference to conflict of laws
or choice of law
23
<PAGE>
principles.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile, by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
[SEAL] ISONICS CORPORATION
By: By:
------------------------- ---------------------------
Brantley J. Halstead, Secretary James E. Alexander, President
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
as Warrant Agent
By:
-------------------------
Authorized Officer
24
<PAGE>
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANTS
The undersigned Registered Holder hereby irrevocably elects to exercise ________
Warrants represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that certificates for
such securities shall be issued in the name of (PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER):
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
(please print or type name and address)
and be delivered to
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
Dated:
----------------------- --------------------------------------
(PLEASE SIGN NAME AS IT APPEARS ON THE
FRONT OF THE CERTIFICATE)
ASSIGNMENT
TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO ASSIGN WARRANTS
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
(PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
(please print or type name and address)
________________________________________________________________ of the Warrants
represented by this Warrant Certificate, and hereby irrevocably constitutes and
appoints ____________________________________Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
25
<PAGE>
Dated:
----------------------- --------------------------------------
(PLEASE SIGN NAME AS IT APPEARS ON THE
FRONT OF THE CERTIFICATE)
- -----------------------------
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. THE SIGNATURE(S)
MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
26
<PAGE>
Exhibit B
No. WC______ VOID AFTER _________, 2001
WARRANTS
CLASS C REDEEMABLE WARRANT CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK
ISONICS CORPORATION
CUSIP # _________________
THIS CERTIFIES THAT, FOR VALUE RECEIVED ___________________________ or its
registered assigns (the "Registered Holder") is the owner of the number of Class
C Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined):
one fully paid and nonassessable share of Common Stock of Isonics
Corporation, a California corporation (the "Company"),
at any time commencing on the date hereof, and the earlier to occur of the
Expiration Date (as hereinafter defined) and the Redemption Date (as hereinafter
defined) upon the presentation and surrender of this Warrant Certificate with
the Subscription Form on the reverse hereof duly executed, at the corporate
office of Continental Stock Transfer & Trust Company, as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of $_______ per share,
subject to adjustment (the "Exercise Price"), in lawful money of the United
States of America in cash or by check made payable to the Warrant Agent for the
account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated ________, 2000,
by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
27
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on (i) the
date which is _____________________; or (ii) the date fixed for redemption
hereof, whichever date is earlier. If each such date shall in the State of New
York be a holiday or a day on which banks located in the State of New York are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is neither a holiday
nor a day on which such banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, following the date hereof and while any of the Warrants are
outstanding, and deliver a prospectus which complies with Section 10(a)(3) of
the Act to the Registered Holder exercising this Warrant; provided however, that
(i) if at the time of exercise of any of the Warrants, the Company does not have
in place an effective registration statement or is otherwise, in the good faith
determination of the Board of Directors of the Company, precluded by applicable
laws from issuing the shares of Common Stock issuable upon such exercise, the
Company may, in lieu of issuance of those shares, elect to redeem the Warrants
duly surrendered for exercise for a price per Warrant equal to the difference
between the Market Price (as defined below) of a share of Common Stock on the
date of such submission and the Exercise Price, and in the event of such
redemption, the Company will pay to the Registered Holder the above-described
redemption price in cash within ten (10) business days after receipt of notice
from the Warrant Agent that such Warrants have been submitted for exercise; and
(ii) if the Market Price of the Common Stock is less than the Exercise Price,
then the Company need not take such actions to file a registration statement (or
a post-effective amendment to a registration statement) with respect to the
issuance of Common Stock upon exercise of the Warrants until such time as the
Company has been subject to the requirements of Section 12 or 15(d) of the
Securities Exchange Act of 1934, as amended, for a period of at least twelve
calendar months immediately preceding the filing of the registration statement.
This Warrant shall not be exercisable by a Registered Holder in any state where
such exercise would be unlawful.
The term The term "Market Price" shall mean: (i) if the Common Stock is
listed, or admitted to unlisted trading privileges on a national securities
exchange, or is traded on the Nasdaq National Market or Nasdaq, the last
reported closing sale price on the five trading days prior to the date of the
event to which such Market Price relates, or, if no such reported closing sale
takes place on such date, then the average of the last reported closing sales
prices for the last five trading days before such date, in each case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to unlisted trading privileges or by the Nasdaq
National Market or Nasdaq, or (ii) if the Common Stock is not listed or admitted
to unlisted trading
28
<PAGE>
privileges, on any national securities exchange, or traded on the Nasdaq
National Market or Nasdaq, but is traded in the over-the-counter market, then
the average of the closing sale prices (or if closing sale prices are not
reported, the average of the last reported bid and asked prices) of the Common
Stock reported by the National Quotation Bureau, Inc. or similar bureau if the
National Quotation Bureau, Inc. is no longer reporting such information on the
date of the event to which such Market Price relates, and if no such prices are
reported on such date, then the average of the last so reported bid and asked
prices on the last five trading days on which such prices are reported
immediately preceding such date; or (iii) if the Common Stock is neither listed,
nor admitted to unlisted trading privileges on a national securities exchange,
nor traded on the Nasdaq National Market or Nasdaq, nor traded in the
over-the-counter market, then the fair market value of the Common Stock, not
less that the book value thereof, as of the date of the event to which such
Market Price relates, as determined in good faith (using customary valuation
methods) by the Board of Directors of the Company, which determination shall be
evidenced by a resolution of the Board of Directors and based on the best
information available to it.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $0.10 per
Warrant, at any time during the term of this Warrant, provided that the last
reported closing sale price for the Common Stock as officially reported by the
Nasdaq SmallCap Market, if the Common Stock is then traded on the Nasdaq
SmallCap Market (or the last reported closing sale price on the Nasdaq National
Market or a national securities exchange, if the Common Stock is then traded on
the Nasdaq National Market or a national securities exchange, in each case as
officially reported by the Nasdaq National Market or such national securities
exchange, or, if the Common Stock is not then traded on the Nasdaq SmallCap
Market, the Nasdaq National Market or a national securities exchange, but is
then traded in the over-the-counter market, then the average of the last
reported bid and asked prices of the Common Stock reported by the National
Quotation Bureau, Inc. or
29
<PAGE>
similar bureau if the National Quotation Bureau, Inc. is no longer reporting
such information), shall have equaled or exceeded $________ per share for at
least twenty (20) consecutive trading days ending on the third day prior to the
date on which the Notice of Redemption, as defined below, is given (subject to
adjustment in the event of any stock splits or other similar events). Notice of
redemption (the "Notice of Redemption") shall be given not later than the
thirtieth (30th) day before the date fixed for redemption, or as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to the Warrants except to receive the
$0.10 per Warrant upon surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and the
Company's right so to treat the Registered Holder shall not be affected by any
notice to the contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of California without reference to conflict of laws
or choice of law principles.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile, by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
[SEAL] ISONICS CORPORATION
By: By:
------------------------- ---------------------------
Brantley J. Halstead, Secretary James E. Alexander, President
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
as Warrant Agent
By:
-------------------------
Authorized Officer
30
<PAGE>
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANTS
The undersigned Registered Holder hereby irrevocably elects to exercise ________
Warrants represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that certificates for
such securities shall be issued in the name of (PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER):
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
(please print or type name and address)
and be delivered to
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
Dated:
----------------------- --------------------------------------
(PLEASE SIGN NAME AS IT APPEARS ON THE
FRONT OF THE CERTIFICATE)
ASSIGNMENT
TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO ASSIGN WARRANTS
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
(PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
- ---------------------------------------
(please print or type name and address)
________________________________________________________________ of the Warrants
represented by this Warrant Certificate, and hereby irrevocably constitutes and
appoints ____________________________________Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
31
<PAGE>
Dated:
----------------------- --------------------------------------
(PLEASE SIGN NAME AS IT APPEARS ON THE
FRONT OF THE CERTIFICATE)
- -----------------------------
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. THE SIGNATURE(S)
MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
32
<PAGE>
[ARTER & HADDEN LLP LETTERHEAD]
May 23, 2000
Isonics Corporation
5606 McIntyre Street
Golden, Colorado 80403
Re: REGISTRATION STATEMENT ON FORM S-4
Gentlemen:
We have acted as special California counsel to Isonics Corporation (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, of a
Registration Statement on Form S-4 (the "Registration Statement") relating to
the public offering by the Company of the securities listed on Schedule A hereto
and incorporated herein by this reference (the "Securities") as described in the
Prospectus in the Registration Statement ("Prospectus").
In so acting, we have examined and relied upon the original or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates, and other instruments, and such factual
information otherwise supplied to us by the Company as in our judgment are
necessary or appropriate to enable us to render the opinion expressed below.
On the basis of and subject to the foregoing, we are of the opinion that
the Securities, when issued and sold pursuant to the Registration Statement and
Prospectus, will, under the laws of the State of California, upon payment
therefor in accordance with the terms set forth in the Registration Statement
and the Prospectus, be duly and validly issued, fully paid, and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
Prospectus forming a part of the Registration Statement. Norton o Lidstone,
P.C., of Englewood, Colorado, is authorized to rely on this opinion for purposes
of issuing its legal opinions with regard to the Securities.
/s/ Arter & Hadden LLP
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Title of Each Class of Securities to be Registered Amount to be Registered
- -------------------------------------------------- -----------------------
<S> <C>
Class B Common Stock Purchase Warrants 810,000
Shares of common stock underlying Class B Common
Stock Purchase Warrants 810,000
Class C Common Stock Purchase Warrants 810,000
Shares of common stock underlying Class C Common
Stock Purchase Warrants 810,000
Class B Common Stock Purchase Warrants issuable upon
exchange of Warrants underlying Underwriter Warrants 80,000
Shares of common stock underlying Class B Common
Stock Purchase Warrants 80,000
Class C Redeemable Common Stock Purchase Warrants 80,000
Shares of common stock underlying Class C Redeemable
Common Stock Purchase Warrants 80,000
</TABLE>
<PAGE>
EXHIBIT 23.10
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated July 23, 1999 (except for Note 13 as to
which the date is July 29, 1999), accompanying the consolidated financial
statements of Isonics Corporation contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
GRANT THORNTON LLP
San Jose, California
March 23, 2000
<PAGE>
ISONICS CORPORATION
LETTER OF TRANSMITTAL
To accompany certificates representing Class A Warrants to acquire shares of
common stock of Isonics Corporation, surrendered in exchange for certificates
representing Class B Warrants; each Class B Warrant is exercisable for one share
of common stock and one Class C Warrant to purchase shares of Isonics common
stock. Please follow carefully the instructions below.
To: Continental Stock Transfer & Trust Company, Exchange Agent
By US Postal Service or Overnight Courier: _________ By Hand
Delivery: _________
Continental Stock Transfer & Trust Company
Exchange Agent for Isonics Corporation
2 Broadway
New York, New York 10004
Ladies and Gentlemen:
In connection with the offer by Isonics Corporation ("Isonics") to issue
Class B Warrants, each exercisable for one share of common stock and one
Class C Warrant to purchase shares of common stock of Isonics registered under
the Securities Act of 1933 in exchange for Class A Warrants of Isonics, (the
"Exchange Offer"), the undersigned hereby surrenders for exchange the warrant
certificate(s) identified below representing Class B Warrants to purchase shares
of common stock of Isonics. (IF I AM EXERCISING THE CLASS B WARRANTS AT THE SAME
TIME I AM SUBMITTING THE CLASS A WARRANTS FOR EXCHANGE, I UNDERSTAND THAT I MUST
ALSO COMPLETE THE INFORMATION RELATING TO THE EXERCISE OF THE WARRANT ON THE
REVERSE SIDE OF THIS LETTER OF TRANSMITTAL.)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of Warrants Represented
by Warrant
Name(s) and Address of Registered Owner(s) Certificate(s) and Exercise
As They Appear on Certificate(s) Certificate(s) Surrendered Price per Share
- -----------------------------------------------------------------------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
Total Warrants
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The undersigned represents that he/she has full authority to surrender the
certificate(s) identified above and that except for the restrictions under the
Securities Act of 1933, the Class A Warrants represented by such certificate(s)
are free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claims. The undersigned will, upon request, execute any
additional documents necessary to complete the surrender of the Class B Warrants
represented by such certificate(s). All authority conferred or agreed to be
conferred in this Letter of Transmittal shall be binding upon the successors,
assigns, heirs, executors, administrators and legal representatives of the
undersigned and shall survive and not be affected by the death or incapacity of
the undersigned. The undersigned hereby acknowledges that delivery of the
certificate(s) identified above shall be affected, and risk of loss and title to
such certificate(s) shall pass, only upon proper delivery thereof to you.
Please issue a Class B Warrant in the name(s) shown in the box above and
deliver such certificates and check by mail to the address shown in the box
above UNLESS contrary instructions are given in the box below.
<PAGE>
EXERCISE OF CLASS B WARRANT: If there is a current prospectus for the
exercise of Class B Warrants, you may choose to exercise the Class B Warrants to
be issued in exchange for the Class A Warrants at the same time you are
submitting the Class A Warrants for exchange. To do so, you must initial and
follow the instructions given below:
____ I hereby elect to exercise all Class B Warrants to be issued in
exchange for the Class A Warrants I am surrendering for exchange;
____ I hereby tender the Class B Warrant certificates to be issued in
exchange for the Class A Warrants;
____ I hereby tender the exercise price of the Class B Warrants
(calculated by multiplying the number of Class B Warrants being
exercised times $5.80 per share) in a check made payable to Isonics
Corporation.
I understand that the exercise is effective as of the date this Letter of
Transmittal and all other required documents are received by the Exchange Agent
provided that: all required documents are included; all required signatures have
been included and signatures have been properly guaranteed; good funds are
tendered; and I am a resident of a jurisdiction where the exercise of the
Class B Warrants has been qualified under state law. If I am tendering a check,
I understand that I must wait until the funds are cleared before any
certificates will be issued.
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
Fill in ONLY if delivery of the certificates representing the Class B
Warrants is to be mailed to an address OTHER than that appearing in the box
above. Please see instruction 3.
Mail or deliver Certificate to:
Name:
-----------------------------------------
(Please Print)
Address:
--------------------------------
----------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
ALL SHAREHOLDERS MUST SIGN IN THE SPACE PROVIDED BELOW
- --------------------------------------------------------------------------------
X ______________________________________________________________________________
(Signatures of Shareholders)
Title: _________________________________________________________________________
Name(s): _______________________________________________________________________
X ______________________________________________________________________________
________________________________________________________________________________
(Please Print)
Daytime Telephone Number
(including Area Code) __________________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s). If signed by an officer of a corporation or others acting in a
fiduciary or representative capacity, please provide the following information.
See Instructions 2 and 5.
MEDALLION
GUARANTEE OF SIGNATURE(S)
(See instruction 4)
Name of firm: __________________________________________________________________
Authorized Signature: __________________________________________________________
<PAGE>
<TABLE>
<C> <S> <C>
- ------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 Taxpayer Part II For Payee Exempt
FORM W-9 Identification No.--For
All Accounts From Backup
Withholding
---------------------------------------------------------------------
Enter your taxpayer
identification number in
Payer's Request for Taxpayer the appropriate box. For Social Security Number
Identification Number most individuals, this
is your social security Employer Identification Number
number.
OR
- ------------------------------------------------------------------------------------------------------------------
Certification--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number, or I am waiting for a number to
be issued to me and either (a) I have mailed or delivered an application to receive a taxpayer identification
number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I
intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer
identification number within sixty (60) days, 31% of all reportable payments made to me thereafter will be
withheld until I provide a number.
(2) I am not subject to backup withholding either because (a) I am exempt from backup withholding, or (b) I have
not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to
backup withholding; and
(3) Any other information provided on this form is true, correct and complete.
SIGNATURE: DATE: , 2000
-----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of this Letter of Transmittal
1. USE OF LETTER OF TRANSMITTAL. This Letter of Transmittal, duly
completed and signed, together with the surrendered certificates representing
restricted shares and warrants to purchase restricted shares and any other
documents required by these Instructions, should be sent by mail or overnight
courier or delivered by hand to the Exchange Agent at the address set forth
above. Delivery shall be affected, and risk of loss and title to the
certificates representing restricted shares and warrants to purchase restricted
shares shall pass, only upon actual delivery of such certificates to the
Exchange Agent. THE METHOD OF DELIVERY OF ALL DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED. A return envelope is enclosed for
your convenience.
2. SIGNATURES. The signatures on this Letter of Transmittal must
correspond exactly with the name(s) as written on the face of the surrendered
certificates. In the case of joint tenants, all should sign. If the surrendered
certificates are registered in different forms of the name of any person signing
this Letter of Transmittal (e.g. "John Smith" on one certificate and "J. Smith"
on another), it will be necessary for such person either to sign this Letter of
Transmittal in each way in which the certificates are registered or to sign as
many Letters of Transmittal as there are different name registrations. When
signing as an agent, attorney, administrator, executor, guardian, trustee, or in
any other fiduciary or representative capacity, or as an officer of a
corporation on behalf of the corporation, please give your full name and title
as such. If a certificate is registered in the name of joint owners with right
of survivorship and one or more of the owners is deceased, the surviving
owner(s) should sign the Letter of Transmittal and furnish a letter providing
information concerning the death of the registered owner(s). It is only
necessary to deliver to the Exchange Agent a properly signed Letter of
Transmittal, together with the related surrendered certificates (it is not
necessary to sign the back of such stock certificates).
3. DELIVERY OF CERTIFICATES AND CHECK TO A DIFFERENT ADDRESS. If a
certificate representing registered shares and/ or warrants to purchase
registered shares or check for cash in lieu of fractional shares, if any, is to
be delivered to an address different from that appearing in the top box above,
please complete the "Special Delivery Instructions" box above.
4. CORRECTION OF, OR CHANGE IN, NAME. For a correction of name, or for a
change in name which does not involve a change of ownership, proceed as follows:
(i) for a change in name by marriage, the surrendered certificates and this
Letter of Transmittal should be endorsed or signed, e.g., "Mary Doe, now by
marriage, Mary Jones" and (ii) for a correction in name, the surrendered
certificates and this Letter of Transmittal should be endorsed or signed, e.g.,
"James E. Brown" incorrectly inscribed as "J.E. Brown." In such event, the
signature on this Letter of Transmittal reflecting such correction or change
must be guaranteed by a financial institution or brokerage firm having
membership in good standing, in a recognized guarantee program [Securities
Transfer Agents Medallion Program, New York Stock Exchange, Inc. Medallion
Program, or the Stock Exchanges Medallion Program (the "Programs")]. No
guarantee will be accepted if the aggregate value of the transaction exceeds the
authorized limit as defined in the Program. Notaries Public CANNOT execute
acceptable guarantees of signatures.
5. SUPPORTING EVIDENCE. In case any Letter of Transmittal, certificate
endorsement or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee, or in any other fiduciary or representative
capacity, or by an officer of a corporation on behalf of such corporation, there
should be submitted with the Letter of Transmittal and surrendered certificates,
documentary evidence of the authority of the person making such execution to
assign, sell and transfer shares. Such documentary evidence of authority must be
in the form satisfactory to the Exchange Agent. See Instructions 8 and 9.
6. LOST OR STOLEN STOCK CERTIFICATES. If certificates representing
restricted shares or warrants to purchase restricted shares have been lost or
stolen, the Exchange Agent should be contacted in writing. The letter should
include the certificate number(s) and number of shares/warrants that have been
lost or stolen along with the holder's name and address. The Exchange Agent will
forward affidavits for completion so that a bond or other satisfactory indemnity
can be obtained, and to make other arrangements so that the lost certificates
can be replaced and the shareholder may receive certificates representing
registered shares, certificates representing warrants to purchase registered
shares, and a check for cash in lieu of fractional shares, if any, in exchange
for such restricted shares and warrants.
7. MISCELLANEOUS. In the event that a surrender of certificates is
defective, the Exchange Agent shall attempt, in consultation with ISONICS, to
take such action as may be necessary to resolve promptly the irregularity, and
in that connection, the Exchange Agent may use its best efforts to contact the
appropriate capital shareholder by whatever means of communication it deems most
expedient. ISONICS shall have the absolute right to reject any or all of such
surrenders that are not in proper form and to waive any defects in or conditions
of such surrender.
<PAGE>
8. INQUIRIES. All inquiries with respect to the surrender of certificates
representing restricted shares or warrants in exchange for certificates
representing registered shares or warrants, and a check for cash in lieu, if
applicable, as well as requests for additional copies of this Letter of
Transmittal, should be made directly to Continental Stock Transfer & Trust
Company, Exchange Agent, at the address above or by telephoning 212-509-4000.
